Why Don’t Most Financial Planners Plan Finances?
“If you don’t know where you are going, you will wind up somewhere else.” – Yogi Berra
What do you call a financial planner that does not plan finances?
I know that sounds funny. But it is an important topic to understand.
Most people assume that when they hire a financial planner, they’re getting a personalized roadmap for their financial life. Yet surprisingly, that’s often not the case, and it can have a huge impact on your future.
In my latest video, podcast episode, and blog post you’ll learn:
- Why don’t most financial planners plan finances?
- What does Ed’s team see with the public?
- What is a financial plan?
- What difference does a Financial Plan make in your life?
Why don’t most financial planners plan finances?
We went to a fascinating conference a few years ago that shows the inner workings of the financial planning industry in Canada. “Financial planning is still about selling” is the title to an article by Jonathan Chevreau.
While many financial planners claim to do financial planning and provide holistic advice, very few actually provide comprehensive planning with written financial plans, as taught in the CFP courses.
The issue is best highlighted by Alan Goldhar, Professor of Financial Planning at York University and Manager for the Ontario Public Trustee. The Public Trustee takes over the finances for people that are mentally unable to make financial decisions. They have taken over more than $500 million in investments for 10,000 clients, most of which had a financial planner, broker or bank advisor. They interview the client and the family and then send in a team to obtain all financial documents.
The shocking fact is that, of the 10,000 clients they took over, none had a financial plan! Not one!
Alan Goldhar also taught Finance at York University, where he says most financial planning students don’t bother completing the CFP designation, because “the industry has jobs for salespeople, not for professional financial planners.” Most advisors focus on the investments or insurance that make them money and consider financial planning to be unpaid service work.
What do you call a financial planner that does not plan finances?? A salesperson.
Cary List, former CEO of the Financial Planners Standards Council (FPSC), said: “The single most common misunderstanding about financial planning is that it is all about investing.”
What do we see with the public?
We have reviewed the finances for thousands families and found the same result – almost none of them had a proper written financial plan prepared in Canada.
Some had an investment projection with a title page that said “Financial Plan”. The people with a proper financial plan either didn’t know where it is, they don’t follow it, or it is not what they want to do in their life.
We wrote a financial plan for a woman that had paid for a plan twice from 2 different fee-for-service financial planners. Both plans were not what she wanted to do in her life. They were what I consider the first step in creating a Financial Plan. She had meetings with the financial planners for only an hour. Then 2 weeks later, their financial plan arrived. It assumed her desired retirement lifestyle is the industry standard 75% of her pre-retirement income and they showed she was far short of her goal and listed several options she could do to get on track. However, she wanted a more comfortable retirement than that and none of the options made sense in her life.
After that, she needed interactive financial planning to look at various possible future lives and figure out a goal that is reasonably achievable that provides a life she wants.
What is a Financial Plan?
To make the issue clear, a financial plan, as defined by the FP Canada, is a written document customized for you that gives you complete advice on all areas of your finances, including:
Cash Flow– Helping you understand how you spend your money.
Debt/Asset Management – Structuring your debts and your assets in the most effective way.
Life Goals, including Retirement Plan – Identify your financial goals in detail and strategies to help you achieve them. This should include your desired retirement lifestyle in detail.
Income Tax Planning– Determine the most effective strategies to minimize tax over your lifetime.
Estate Planning– Determining the most effective way to transfer your assets to your beneficiaries.
Risk Management– Determine your needs for insurance and which type is the cheapest/most effective for you.
Investment Management– Recommending the strategies and investments appropriate for your plan and keeping you focused on your goals. This should be both within your risk tolerance and with enough growth potential to achieve your life goals.
In short, it is the GPS to the life you want that allows you to make life decisions with your overall plan in mind, instead of making each decision on its own.
A financial plan is not an investment projection, a questionnaire, a goal based on a rule of thumb, or a document with nice graphs printed out in 30 minutes or less.
What difference does a Financial Plan make in your life?
From experience, we find that the benefits of having and following a financial plan are far more significant than people realize – and far more significant than Investment A vs. Investment B. For example, the main reason most Canadians will retire at a much lower standard of living than they want is because they never clearly defined in detail the retirement lifestyle they will want, figured out how much they need to invest to get there or what kind of strategies/investments they need to reach their goal.
Just keeping you focused on your goals alone can be the most obvious benefit of a plan. Anyone that lost focus and sold investments when they were down has wiped out years of gains. Your financial plan can keep you focused throughout your life.
We find that most of our clients make major changes to their finances once they have their Financial Plan. They realized they were not on track for the life they want or they realized they could have more than they had previously thought. They changed how the managed their finances, much they saved, they types of investments, and often financial strategies.
Having their Financial Plan gave them:
- Peace of mind that they are on track for the life they want.
- Confidence their finances are managed well and they are doing all the right things.
- Freedom to not worry about money and be able to focus on their life.
Having vs. not having your Financial Plan is like the difference between driving in a new area with or without a GPS.
“You did not plan to fail – you just failed to plan.”
Ed
Planning With Ed
Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax accountant, expert in many tax & investment strategies, and a popular and passionate blogger.
Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.
The “Planning with Ed” experience is about your life, not just money. Your Financial Plan is the GPS for your life.
Get your plan! Become financially secure and free to live the life you want.
Hi Maria,
It’s never too late to start. The more time before retirement, the more options you have and the more comfortable your retirement can be.
We do get quite a few people that start with us when they are about to retire. They did their own investing, but don’t know how to setup a retirement income effectively and tax-efficiently. They don’t get the retirement planning benefits, but they still get the retirement income planning benefits.
Since you have been with a large financial instituion, you may enjoy my next article/video/podcast “Investment Risk that Affects Your Life vs Investment Industry Risk”. It includes explanations of what they usually do wrong.
Ed
Hi Maria,
I understand. Unfortunately, banks are mainly sales organization.
Financial Planning is for the rest of your life, not just until you retire. It’s not too late for you.
Request a Free 30-Minute Consultation if you want to talk about this. http://www.edrempel.com/talk .
Ed
Hi Ed, I am 4-5 years from retirement and have been using a large financial institution to do my financial planning – and often felt pressured to buy new products even though they did not fit my needs. My question…. is it too late to start a “real” plan with only 5 years to retirement?
H Burzin,
Yes, bank employees are not allowed to talk about tax or insurance, and they do little or no financial planning.
It’s not much better with independent financial advisors or brokers. Nearly all are investment focused, which makes them short-term focused.
There is such a huge need by so many for real, unbiased, knowledgeable advice based on a financial plan. So many people don’t know what they should do or how to optimize everything.
The strange thing is that they underperform because are investment focused. It makes them short-term thinkers, so they focus on fixed income to reduce short-term volatity – instead of long-term return.
Ed
Bang on Ed!!! Banks are number crunching product pushers. Having worked at 3 leading Canadian banks, I can confidently vouch for that. As it is they have a product limitation of only mutual funds and gics and if that was not bad enough, they even got rid of the third party fund lineup. So much for unbiased advice. However the moot point is, regardless of any of that , there is little to no financial planning done and also since they are not insurance licensed , they cant go much further with any risk management, tax or estate planning.
Hi Teresa,
Thank you so much for taking the time to say that, Teresa.
Ed
You hit the nail on the head. I always wondered why we had such bad experience with at least 4 so called financial planners and finally went the DIY way until my daughter in law introduced us to you! Most so called financial planners are just salesmen selling investments for a commission now that I read your description and I fully agree!
Hi James,
Interesting question. The main point of the aritcle has not changed. Less than 1% of “financial planners” have written even one comprehensive financial plan in their career.
Financial planners refer to financial planning as “unpaid service work” that you need to get out of the way so you can start selling investments.
We just hired another financial planner for our team. It was hard finding anyone with experience writing comprehensive financial plans.
The CFP designation is the best way to get the knowledge, but financial planners in large firms see it as a path to a promotion, not as a source of knowledge on how to write proper financial plans.
The banks and large firms are very sales-oriented. Advisors can get let go quickly if they don’t produce. The regulators add more and more rules and restrictions, which adds a lot of cost. Advisors need a signficant volume or asset base to cover costs.
What has changed is the “rise of the fake plan”. A lot of advisors produce “fake financial plans” now. Firms give lip-service to financial planning and have seen they can get more sales with a “fake financial plan”.
Most firms now have financial planning software that is designed to print off very nice looking “fake financial plans” after entering in only very basic information about a client. Many firms have a para-planner that can write a simple, one-option financial plan (so the advisor does not have to spend time).
Surveys say that 40% of Canadians claim to have a financial plan. I meet people all the time that claim to have one. I ask what their basic plan is and a couple simple details, and they have no idea. The answers I get are:
– They have no idea when they can retire (but they gueess), how much their retirement income will be, what they have to do to get there, or how much of a total portfolio they need to have the retirement they want.
– I ask where their financial plan is, and almost nobody knows.
– I ask how long they met with the planner to write the plan and it is usually 30 minutes or less.
– I ask how many possible life scenarios were taken into account in the process and it is almost never more than one.
Even the fee-for-service financial planners, who are generally the best ones, usually do one-life-option plans or modular plans (working on one issue only). We have had quite a few clients come to us after paying for a fee-for-service financial plan, but still not knowing what to do to have the future they want.
There is almost no competition in Canada for what we do.
Advisors always say it is a competitive industry, but they are referring to the investment industry.
There is change starting to grow, though. There are more and more fee-for-service financial planners. Canadians are starting to see the value in unbiased advice – financial advice NOT from an investment sales person.
You may be interested to know that “fee-for-service financial planner” is more highly respected by Canadians than a “certified financial planner” or a “CFP Professional”. CFPs are widely considered salespeople.
When I started referring to myself as a fee-for-service financial planner years ago, I had a huge jump in calls and emails from people looking for a Financial Plan.
By comparison, as an experiment, I tried taking all my designations off my blog. I had another increase in new clients – more clients without saying I’m a CFP!
DIY investors with low-fee ETFs or couch potato portfolios don’t have a financial plan either. The advantage is that they know it now. Most used to have an advisor and many believed they had a plan then.
Robo-advisors have become popular and are another example of a “fake financial plan”. They have very simple software and claim to be giving advice.
The new clients we get are mostly from the low-fee ETFs investors or robo-advisors. They are more clear that they do not have a financial plan. They are often more knowledgeable than people with advisors, as well. Having some financial knowledge can help them understand the benefits of having a financial plan.
These moves are in the right direction. They are very small, so far. DIY investors and robo-advisors combined are only about 10% of the market.
It’s not clear what the future will hold:
– Fee-for-service financial planning is rising, which is good.
– The industry is moving from DSC to fee-based. Both are equally sales-focused, but in general, DSC advisors tended to have more loyal clients.
– Millennials are more likely to be DIY investors, so that market is growing. I doubt it will every be more than 20% of the industry though. They don’t even get a “fake financial plan” or a simple, one-option financial plan, but they are more likely to realize they need a financial plan.
It’s good for you to learn. The CFP is the key financial planning designation. It will be interesting to see what happens in the next 6 years for you, James.
Ed
Hi Ed,
I didn’t realize when I read this article this morning that it’s over 12 years old, so I’m curious…..I’m hoping to retire in about 6 years around age 60, and this September I’m starting the CFP course – mostly it’s going to be for my own personal growth as I approach retirement, but possibly as a side hustle in retirement – if I think I can do a good job.
In the intervening 12 years – how have things changed (or not) in your opinion? Many of the factors you described sound as familiar to me today as they would have when the article was first published (financial education comes to my mind immediately), but I also think fee for service financial planning, while not yet mainstream, is starting to be better understood. What with low-fee ETFs, the couch potato investing movement, and the like, I feel as if there is a change in current – if not a change in tides.
What do you think?
Wow, quite a detailed reply. I have my answer. I appreciate your effort and time, Thanks, Mark
Hi Mark,
Great question. In my opinion, permanent insurance is heavily oversold. It is oversold mostly to hardworking entrepreneurs that really hate tax, but don’t have a lot of knowledge. (I feel very badly for them, after they work so hard.) It is oversold mostly because it pays the insurance salesman the highest commissions.
It is oversold to people that don’t need insurance or that actually need many times more insurance. Two redent clients:
– One client needed a $4 million policy, but had a whole life policy for $500,000 – at 5 times the cost of a $4 million term policy.
– One client did not need any insurance whatsover, but was spending $20,000/year for a policy he did not need.
Contrary to the sales pitch, they are NOT tax efficient while you are alive. They are only tax-efficient if you don’t touch them until after you are dead. 🙂 If you cash them in, most of the growth is taxable, because they are mostly invested in bonds.
The sales pitch is that you don’t have to cash them in ever. You can borrow against them without paying tax. This is bizarre! You can borrow against your home to spend during your retirement at a lower rate. Do you think financing your retirement by spending a huge credit line against your house would be a smart idea?
There are 2 types: Whole life and universal life.
Let me make an apples-to-apples comparison to a whole life policy. Would you buy this investment:
– Mutual fund with 3-4% MER.
– You are not told who the fund manager is.
– You are not told what it invests in.
– You have one choice of investment and can never change during your lifetime.
– To buy the investment, you have to pay for an expensive insurance policy whether or not you need one.
– If you cash it in, you pay a lot of tax.
– The first 5 years of payments are entirely to pay the commission of the salesperson. Your cash value is zero.
– You can withdraw money without tax if you take a loan at a somewhat inflated rate with non-deductible interest that you must pay for the rest of your life.
– The growth is fully taxable, like interest, not at a prefered tax rate, like capital gains or dividends – or especially deferred capital gains.
– Your growth is managed. If your investment has a good year, the company keeps part of the growth and gives it to you in a future down year. The company decides every year how much growth they want to give you.
Would you invest in that?
Universal life policies are a little better, but not much. They are mostly like whole life policies, except that you can choose between a few investments, although all must be from the insurance company your policy is with. The MER is usually high. Your investment selection low. You have to buy the insurance whether you need it or not. It is complicated and probably even your salesman does not understand it.
Permanent insurance can be a good choice if:
– You are a very conservative investor and cannot tolerate market fluctuations.
– You need insurance for life. This usually only applies if you have a large, illiquid asset, such as a business or cottage, to pass on to your kids.
– You are investing money for your heirs and there is no chance you will want to access any of the money during your life.
Most of my clients are not that conservative. Equity investments typically have many times higher returns over the long term.
A better investment would be super tax-efficient mutual funds that invest in equities. There are some mutual funds designed to pay zero taxable distributions of interest, dividends or capital gains. You will only pay capital gains tax when you sell.
Super tax-efficient investments have the long-term tax deferral of permanent insurance with no tax at all for decades, plus a bunch of other benefits:
– Far higher long-term growth because you can invest in equities.
– When you sell, you pay a tax-preferred capital gain, not a mostly fully taxed like permanent insurance.
– You are not forced by buy an expensive insurance policy.
– MERs are lower.
– You can withdraw from them during your life without having to tax a loan at an inflated rate.
– You can buy them fee-based, and not have to pay 5 years premiums to pay the salesman’s commissions.
Here are the wisdom’s you need to know:
– “Never let the tax tail wag the investment dog.”
– Buy term and invest the difference is almost always sound advice.
I know an insurance saleman that sells only whole life to business owners. He makes about 3 sales per year and makes $100,000 commission per sale. He rarely has to ever talk with a client again.
I feel so sorry for the hardworking entrepreneurs that are targeted for whole life insurance. They hate tax and are easily sold a crappy investment with perceived tax benefits.
The sales pitch is slick and sounds really good. The salesman is highly motivated. Think logically and always compare to “term and invest the difference”.
I state this strongly, because I think permanent insurance is one of the biggest oversold products that is often quite detrimental to the client.
Does that answer your question, Mark?
Ed
Hi Ed, do you have any experience with maximum funded tax advantage insurance contracts? I would like to learn more about these. Thanks, Mark