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:

  1. 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.
  2. Blame the schools – Financial education is not taught in schools, even though it is a basic life skill.
  3. 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.
  4. Blame “financial planners” – Most advisors focus on the investments or insurance that make them money and consider financial planning to be unpaid service work.
  5. Blame the banks, insurance companies and planning firms – They have not been able to figure out a good business model that includes financial planning.
  6. 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.
  7. 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”.
  8. 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?

 

Ed

3 Comments

  1. Mark Pouliot on May 3, 2019 at 4:56 PM

    Hi Ed, do you have any experience with maximum funded tax advantage insurance contracts? I would like to learn more about these. Thanks, Mark



  2. Ed Rempel on May 13, 2019 at 9:47 PM

    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



  3. Mark Pouliot on May 14, 2019 at 2:02 AM

    Wow, quite a detailed reply. I have my answer. I appreciate your effort and time, Thanks, Mark



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