What is in a financial plan?

Q: With a fee-only financial planner, what would I receive in a financial plan?
–James

A: The short answer, James, is it depends. Now, for the long answer.

The financial planning profession is not regulated, so there are a wide variety of financial planners out there. In fact, Quebec is the only province with any rules in what is otherwise the wild west.

Someone can only put themselves out there as a financial planner in Quebec if they have a Pl.Fin designation from the Institut québécois de planification financière (IQPF) or they hold the Certified Financial Planner (CPF) designation from the Financial Planning Standards Council (FPSC).

In other provinces, anybody can call themselves a financial planner. But the CFP designation is a good starting point. It’s an international benchmark.

What a financial plan entails is equally broad, James. Not only is the term “financial planner” unregulated, but the provision of financial planning advice is effectively unregulated as well. If you work with a financial planner who sells investments or insurance, their investment or insurance license has certain codes of conduct, but these relate primarily to product sales as opposed to financial planning.

The FPSC—my governing body—defines financial planning as “the process of creating strategies, considering all relevant aspects of a client’s financial situation, to manage one’s financial affairs to meet life goals.”

They promote a six-step planning process consisting of:

1) Financial management
2) Tax planning
3) Asset management (investments)
4) Risk management (insurance)
5) Retirement planning
6) Estate planning

The most consistent part of a financial plan, James, is the retirement plan or projection component. It contemplates your current and future income, expenses, assets and liabilities and projects out every year for the rest of your financial life. The intention is to help answer the question: how much? How much do you need to save every year to achieve financial independence? How much do you need to have saved by a certain age to retire? How much can you afford to spend in retirement? How much do your investments need to return each year to stay on track? And so on.

Retirement models can be rudimentary and rough, using constant spending, flat investment returns and average tax rates. Or they can be comprehensive, with variable spending, probability return simulation (Monte Carlo), dynamic tax rates and scenario analysis.

The key to a financial plan is that it should fit together all of the pieces of the puzzle, from financial management to tax planning to investments to insurance to retirement planning to estate planning. Beyond that, it should make sense to you, James. It’s meaningless if someone tells you you’re going to “be ok.” It’s meaningful if you understand why and you buy into the financial choices you’re making today and how they are going to make you better off tomorrow.

Financial planning, within the broader financial industry, is sometimes complimentary to the planning process. Sometimes it is part of a product sale.

Fee-only financial planning used to mean a financial planner who sells their time for an hourly or flat fee. Now, it is used interchangeably with fee-based investment advice, whereby a fee as a percentage of your investment assets is charged for managing those investments. So make sure you know what kind of “fee-only financial planner” you’re looking for in the first place, James.

The ambiguity is one of the reasons I call myself a fee-only, advice-only financial planner, to try to differentiate between myself and the majority of investment advisors who now charge a fee for assets under administration.

My best advice is to ensure at minimum a financial planner is a CFP, consider whether you want planning and products coupled or separate and ask questions to ensure what you’re getting lines up with you’re looking for in the first place.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Updated Aug. 15, 2018

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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