Transcript
What is the price of a financial plan? That is a popular question. Today, though, I will consider the other side and discuss the cost of not having a financial plan.
What is a Financial Plan
However, before we discuss the cost of not having a financial plan, let us define what a financial plan is. Well, a financial plan is a document. When we say document, it could be a soft document, meaning it is a digital document, or a hard copy or physical paper.
Moreover, that document outlines your current financial and, short-term and long-term goals. This financial plan has strategies for achieving those goals.
Understanding What a Financial Plan Covers
The other question you may have is, what goals and areas does the financial plan cover? Well, according to FP Canada, these are the areas that are typically covered. And these are the areas that my plan covers, along with a few others.
Financial Management
The first one is financial management. And what it looks like it…
It looks at your cash flow and your net worth. So, we are evaluating your cash flow management, savings development, effective debt repayment, spending, saving, and borrowing. Essentially, that is what we are looking at from a financial management standpoint.
Insurance and Risk Management
The second section that we are looking at is insurance risk management. Why are we doing this? You could have the best plan in place, but if an unforeseen event happens, that could cause significant damage to the plan. It derails your plans. Moreover, we are talking about plans; these unforeseen events could be debt, disability, critical illness, or being sued, right? So, we are evaluating your situation. We are looking at your current risk and seeing what we can do to protect you and mitigate any unforeseen event that could cause financial loss. So that is what insurance and the risk management area is.
Investment Planning
Then there is the investment planning. We focus on optimizing your assets, taking into account your risk tolerance and investment goals. When we think about assets, I usually think about three asset classes. First, there are paper assets and investments such as mutual funds, stocks, ETFs, etc. The second one is business. The third one that we look at is real estate. Real estate sometimes falls into business, but often, people do it separately. So, I look at it as three asset classes. Furthermore, what we are doing here is focused on optimizing those assets.
Tax Planning
The next one is tax planning. Through some type of strategic planning, we reduce or defer your current or future tax liabilities so that you’re as tax-efficient as possible. That enhances your financial position. If we reduce your taxes, it means you pay less; you have more money to invest and go towards your plan. Additionally, we could defer those taxes, which allows your money to compound and grow for a longer time, which works out for the best. So that is what tax planning is. We’re making sure that you’re in the best financial position possible and that we save as much money as possible.
Retirement Planning
The next one is retirement planning. And what happens to you post-employment? We ensure that your projected income and assets can support your retirement lifestyle. Now, this requires ongoing assessment because it changes, you know, inflation and the portfolio might be changes in the portfolio, might be changes in your income, emergencies happen, expenses happen, or, you know, you might get an inheritance.
That is what retirement looks like. Nonetheless, many people say, I am not going to retire. We look to see when you want to be financially independent and have the option to retire and what that looks like after that time. Many people want to continue working part-time, or they want to go from being employed to being a consultant, things of that nature. That is what retirement planning is.
Estate Planning and Legal Aspects
Then, there are estate planning and legal aspects. Now, what is estate planning? Well, we are focusing on your asset distribution upon your death. Furthermore, we are looking at your beneficiaries and seeing the best way to transfer these assets over to them, right? And you know, with estate planning goals, you know, you could have the best plan in place, but sometimes there are huge disagreements after you die. So can we have conversations now with the family to make sure the executor is up to date, whether it be from a corporate level, you could have a corporate executor, or whether it be the person you choose, sister, cousin, aunt, friend, whoever, make sure that person is capable and make sure that person has the correct information to make the decision when the time comes.
Additionally, we look at the legal aspect and the circumstances because much of what we do as financial planners is grounded in law. For example, financial planning and family law are a huge part of financial planning. For example, tax law plays a massive part in tax planning. So we have to understand the legal circumstances, you know, and make sure we are informed and convey this to our clients. And here is the thing: sometimes, it goes a lot deeper, and that is where we bring in the experts. You know, I am a lawyer. I am not a practicing lawyer, but I would not go beyond the line of practicing law. Thus, we bring in our network of experts, whether it be a business lawyer, tax lawyer, or whomever it is, if we really need to get some decision made. No, to the cost of not having a financial plan. This study came out by Serrano and it’s called More on the Value of Financial Advisor.
The Cost of Not Having a Financial Plan/ The Price for a Financial Plan
The 2018 results confirmed the positive impact of having a financial advisor. Specifically, it states that those with a financial advisor for 15 years or more have asset values of 131 % higher than the average compared to households without a financial advisor. Folks, that is quite significant. Let us see how significant this is. It is as significant as saying if you are going to retire with a million dollars without a financial advisor, then working with one would mean you would have had$1 .3 million. That is an extra $310,000.
Many people are going to say, okay, what type of financial advisor? When thinking about financial advisors, the ones they spoke about in the study were a lot from the banks, and some were from independent advisors, right? And what I spoke about before was a financial plan, which was probably more comprehensive in certain situations than the advice the financial advisors gave here. So, what I am talking about is even more comprehensive and potentially even more beneficial, at least in my assessment.
Nonetheless, the big takeaway here is that if you were on track to retire with a million dollars without a financial planner versus retiring with a financial advisor, you would have $1.3 million. That’s an extra $310,000. So, often, we focus on the price of the financial plan. So it would help if you considered the cost of not having a financial plan, which I believe is quite significant here. It is one way to look at the price, but you have to look at the potential cost of not having it.
Choosing the Right Financial Advisor
Ensure you have a financial advisor who is good at what he or she does. He or she should be knowledgeable. In most cases, I’m going to say a certified financial planner is probably pretty good because they’ve gone through the standards and have a conversation. What does your process look like?
How have they worked with other clients? How have they worked with clients like yourself? How long have they been in the business? What is their expertise beyond just having a certified financial planner? Suppose you are a business owner looking to retire or sell your business. In that case, you may want to work with a certified exit planning advisor, which is, you know, another designation, right? It all depends on your situation. Nonetheless, the big thing and the big takeaway here is that working with a financial advisor is quite significant, and the benefits are huge. Hopefully, this was helpful, and I will see you next week
