Hello and welcome back to our financial literacy series on financial planning. In the last post I outlined Step #3 in the planning process – the Financial Diagnosis™. Today we’re going to cover the 4th step. This is what I call - The Financial PrescriptionTM more commonly known as the financial plan presentation!
Plan Development
After completing the Gap & Risk analysis in step #3, a planner’s job is to create and document a financial plan for presentation to their client. For those who have never been through this process, you’re probably wondering what to expect in a financial plan.
I’d be remiss if I didn’t start by explaining what a financial plan is NOT. Over the years when asking potential clients to bring in their current plans, I’ve seen many things that they thought were plans. Things like:
- An investment projection comparing results with different rates of return on a portfolio
- A RRIF payment schedule/projection illustrating how long their RRIF might last at a certain rate of return, with varying drawdown rates
- A folder with a few fund fact sheets along with an investment projection
Make no mistake, none of these would qualify as a financial plan!
Common Plan Elements
So, when it comes to a professionally developed financial plan, what should it include? This can vary depending on the complexity of the plan you hired your planner to complete back at the engagement stage. Perhaps the best way to illustrate this is to outline the major elements that should be covered in a comprehensive plan.
- A summary of what’s important to you – your specific goals and objectives.
- A list of the major financial assumptions used in the analysis. Inflation rate, investment rate of return, life expectancy and anything specific to your unique situation.
- A net worth statement – showing your current financial position.
- A cash flow analysis, current and projected to life expectancy.
- A risk analysis including life and disability insurance needs
- An estate analysis
- An investment analysis of your current holdings
- A risk profile assessment for investments with a comparison to your current holdings
- A stress test of the plan outcomes
- A recommendation section – with several alternatives listed, customized to each goal.
- An Investment Policy Statement – (if specific investment recommendations are being made)
- An action plan for who is to do what and when (advisor, client, other professionals)
The Plan Presentation – Tradition vs. A Living Plan!
It’s important to have these elements in your plan. However, the way a plan can be presented today has dramatically changed, and for the better. The “old way” was to provide a printed document ranging in size from a few pages to a hundred or more. Can you see any problems with this approach? Not only is it overwhelming, but most people would just file it away after the presentation.
Most people’s financial life is dynamic and changes over time. This makes a simple printed plan outdated as soon as it’s printed. Wouldn’t it make more sense for your plan to represent the dynamic nature of your life? For any Twilight Zone fans – “Imagine if you will”….. a more collaborative process where you make changes in real time during the presentation with your planner, thus bringing your plan to life. Then when “life happens” and things change for you, new scenarios can be added so you can see the effects. This is all possible with great new software! Of course, this live session should be supplemented with an executive summary plus a few targeted reports to read and consider over a cup of coffee or glass of your favorite libation.
A few Key Focus Areas
- The first thing the planner should do when presenting is review what’s important to you - your goals and objectives. When they do this, ask yourself if you think they truly understand the essence of your hopes, dreams and fears for your future and what you want in life? If not, the rest of the plan won’t be meaningful. Don’t be afraid to send them back to the drawing board at this point until they get this part right.
- Regarding the recommendations of the plan, they should outline several options for you to consider and incorporate any of the changes you may have made on the fly as you collaborated during the presentation.
- This session should be very interactive with you asking lots of questions and getting clarification on anything that you don’t understand.
- It’s now your job to assess the options presented to make an informed financial decision that you will be comfortable with going forward.
- This is your future! If you need time to digest the concepts and solutions presented to fully understand how they will affect you financially, then take the time needed! Clarity and confidence about your financial future comes not only from a great plan, but also from one that you understand and have participated in creating.
Until next time, remember ……..Without a Plan – It’s Only Money!
Additional Resources:
If you would like additional detail on these steps, or the broader financial planning process, check out our future posts in this series. Or you can e-mail me at info@truenorthretirement.ca and ask for our The Fearless Retirement BlueprintTM.
Also, you can visit the FP Canada website for the Canadian public at: https://financialplanningforcanadians.ca
