“If you don’t know where you are going, you will wind up somewhere else.” – Yogi Berra
We went to a fascinating conference this week that shows the inner workings of the financial planning industry in Canada. Last week was the first annual Financial Planning Week in Canada, so all the “experts” met for a day to discuss how the industry is misunderstood. “Financial planning is still about selling” is the title to Jonathan Chevreau’s article.
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!
We have reviewed the finances for about 2,000 families and found the same result – none of them had a proper written financial plan prepared in Canada.
Alan Goldhar also teaches 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. It’s like graduating from medical school and then being allowed only to check temperatures and change band aids.”
Cary List, CEO of the Financial Planners Standards Council (FPSC), says: “The single most common misunderstanding about financial planning is that it is all about investing.”
First, to make the issue clear, a financial plan, as defined by the FPSC, 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.
- Income Tax Planning– Determine 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.
In short, it is a complete “road map” to the life you want that allows you to make decisions with your overall plan in mind, instead of making each decision on its own.
A 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 15 minutes or less.
From experience, we find that the benefits of having and following a 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 figured out how much they need to invest 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 since last fall has wiped out years of gains.
“They did not plan to fail – they just failed to plan.”
Why is the industry focused on sales, instead of financial planning? What needs to happen so that Canadians will get real professional plans from their financial planners?
Here are the main suggestions at the conference for why most financial planners don’t plan finances:
- Blame the public – Financial planning is misunderstood by the public. Most people think short term and do not understand why they need a financial plan. Canadians do not ask that their advisor to do a comprehensive, written plan for them.
- Blame the schools – Financial education is not taught in schools, even though it is a basic life skill.
- Blame the industry organizations – They have not effectively educated the public on the need for a plan. They also have a confusing list of degrees, instead of focusing on the CFP designation.
- Blame “financial planners” – Most advisors focus on the investments or insurance that make them money and consider financial planning to be unpaid service work.
- Blame the banks, insurance companies and planning firms – They have not been able to figure out a good business model that includes financial planning.
- Blame the regulators – They focus regulation on products and disclosure related to products, and do not make allowances for advice that is part of a comprehensive plan.
- Blame the government – There are no national restrictions on who can call themselves a “financial planner” or “financial advisor”. Those that do not write professional financial plans and have the qualifications should have to call themselves what they are: “mutual fund salesperson” or “insurance rep”.
- Blame the industry –The industry has effectively taught the public that most “financial planners” are just salespeople. Most people have met with or know a “financial planner” and the planner did not do a plan, but mainly just tried to sell them a mutual fund or insurance.
What do you think? Why don’t most financial planners plan finances?