Today, in the digital information age, there are a wide variety of opinions of what a financial plan should look like. Even a congregation of CFP’s (Certified Financial Planners) might have a variety of approaches and thoughts.
The answer truly is in the eye of the beholder. As an active CFP providing financial advice I can tell you we have a wide range of clients. We have clients who need financial assistance, clients needing monthly budgeting, right down to others who basically use us to confirm their positions on their holdings.
As a very short definition a “financial plan” should be something like this; a plan within your means to meet achievable lifestyle goals and long term financial independence at a risk level you can tolerate. Sounds easy, doesn’t it?
A financial plan is not about your rate of return. It is about generating enough return without compromising your risk tolerance. It’s also about having protection in place appropriate for your stage in life, whether it be life insurance, critical illness protection or disability and income coverage. It’s about having a will, an executor and a power of attorney and understanding what each of their roles are.
The most important part of a financial plan is starting one. Many people today have a “financial advisor”, someone who helps them invest and holds their hands at times of uncertainty. Some would even be able to recite what their rate of return was the past few years. Few would be able to tell you what their post retirement income will look like and what age they will retire at. Far too many people make the assumption that an investment statement is a financial plan.
Think about going for a drive. If you know your destination, directions, distance and the speed you might average you can guesstimate your time of arrival. If you hit traffic, you’ll need to go faster to hit your ETA or push your ETA back if you don’t want to speed. Financial planning is very much along those lines. If you don’t have a destination you can’t calculate the directions or speed, if you have the directions but not the speed, you can’t calculate when you will arrive.
A financial plan allows you to plan what your income will look like, if you are on target, if you need to make adjustments to stay on task or if you have to alter your goals or risk, the least desirable variable.
What should it typically contain? It will always have to make some assumptions as one cannot predict the future 100% accurately. You can make many of these assumptions in a safe manner. You can, for example, predict that your desire to be exposed to some risk will reduce as you near retirement. You will be more interested in protecting your capital than risking it to grow it further. If you’ve planned carefully you can assume if you showed restraint that your debt level should be less on retirement. Things like mortgages and your children’s education should be things of the past. Work travel costs and clothing will lower daily expenses.
It should include diversity. The more your plan includes diverse assets such as your home or real estate, your investments, fixed income pieces the less chance of a business or economic cycle affecting your ability to meet your goals. There is no right or wrong way to get there. Some people will sell their business or downsize their home to fund or assist with their retirement goals and these should always be part of the plan.
The next most important piece is that you review it annually. If there’s been a turn in the road and you don’t account for it you will be off course. Running a financial plan is no different. If you contribute less in a year or add to things with an inheritance for example, whatever it is you should constantly be updating your situation with your financial advisor. A good advisor will be communicating with you all year and know what is going on in your life.
Be realistic. Thinking you’re going to generate 15% on all your investments or assuming your Uncle Ned is leaving you all his money without knowing could leave huge gaps in your plan. Plan on working to where your plan meets your target. Expect turns in the road. Very few people go an entire lifetime without some financial hardship or unpredictable experience. A long term job loss could erode capital savings and extend your retirement start date.
Work with someone who understands your priorities. While the numbers and rate of return can be important, having some who is on the same page can be more beneficial. Not only will you have more confidence in identifying to them what your wishes really are, but if they have all the information they can help you make more tax efficient decisions trying to achieve you goals. If you’re concerned that your advisor will not understand why you want to buy a Harley or motorhome when you retire or your desire to leave money to a charity you might have the wrong advisor. Remember, it’s your money, you don’t need their approval to meet your own goals and dreams. You simply need them to help you figure out how to make them a reality in the simplest, most tax effective way.
Make sure your advisor is accessible. You should be able to call your advisor and get a reply within 24 hours and if they are on holidays at least a reply from their office to see if they can help.
Remember, there is huge value in having an advisor just from a rate of return perspective. Historically speaking, clients managing their own assets under-performed assets managed with a planner by significant percentages over time. Sure, some of this comes from know-how and industry acumen, but a larger percentage is from patience and removing emotion from the process. Most people buy a stock after they’ve heard about it or sell it too late because they never believe it can fall further. Having someone hold your hand through a market correction and not sell at the bottom has tremendous long term value.
Don’t be afraid to ask a potential new advisor for references. Call others and see if they are receiving the treatment and service you want to have. Find and select someone you can work with because it can be a long ride. You want to be sure the person you will be working with is compatible to you.
Then again, most importantly, start your plan.