Is your financial plan working for you?

We all know what a financial planner does, right?
We make assumptions.
We believe they are doing all the right things for us.
Sara McCullough breaks down the myths, and the mistakes people make, when working with their financial planner, or choosing one.

They are the planner, but it is your money, it’s YOUR plan. That makes sense.

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough: (00:01)

Yeah, I'm completely not ready. So let's do this thing

 Sara McCullough: (00:29)

 You know, what a financial planner does, right? You know, because you know what a financial plan is, of course you do - we all do don't we? A financial planner is that person in that office; the person with the graphs, printing all the graphs, a financial planner is the person who talks about investments. The ones you have, the ones you could have, the ones you should have. Well, if that's all a great financial plan is, or does, if that's it, then this would be the world's shortest podcast on financial planning.  Set your watch, if you still wear one, more likely set your phone because in the next 20 minutes or so I'm going to talk about the myths, the mistakes, and the absolute must haves when it comes to a really good financial plan, because after all, why would you want any other kind of plan? I'm Sarah McCullough and this is Sara Makes Sense.
 
 Sara McCullough: (01:23)
There are the things we don't really talk about; family stuff, in-laws, career concerns, career doubts, our own relationships, old resentments; those are the things we want to leave unsaid. The other topic we really don't feel comfortable talking about is money. Money is definitely one of those things. Oh, sure, we get advice; maybe from those family members I mentioned a moment ago. We hear things. We may read the financial section from time to time.  You may find a blog or watch a show. You may even read a self-help financial book, but we rarely, if ever, talk about finances with someone who can clearly and concisely answer our questions. Why is that? You work hard. We all do.  You save, or at least try to, again, we all do.  You think and dream about the next big thing; car, house, kids education, retirement, we all do. These are our regular money goals and thoughts.

Sara McCullough: (02:32)
Then every once in a while, we have those late night conversations or moments where we drift into thinking about what if I could or I'd really love to, or what if we move to, then we come back to the mechanics of how to get all those goals and dreams; income, savings, expenses, choices, products. The list is a long one. And the thinking, worrying, trying to organize is long too. On average Canadians spend seven hours a week worrying about money. As I said earlier, the fact remains. These are the things we don't really talk about. The term financial planning has been around for decades. Many companies, usually wealth management firms, say they do it. You pay for it in your mutual fund or investment fund fees. But here's the thing. And this is why I'm standing here talking to you right now. There is no standard around how the term financial planning is used.

Sara McCullough: (03:33)
And so, as you can imagine, there are also a variety of outcomes when you are the client.  Often financial planning is used as a sales tool. You may have experienced this yourself. An advisor will plan for you up to the point when you agree to move your investments to that advisor, the plan was really crafted around helping you understand how the advisor would sell you products that would help you. And as a client, the words that we want to complete that sentence are help you meet your goals. We all need products and investments to get us to our goals. There's nothing wrong with selling them or buying them. We run into confusion when the sell or buy happens out of order. In other words, when you buy something to fill a gap or build a bridge over something that you haven't defined yet.  Well, how can that happen?

Sara McCullough: (04:23)
Sometimes the advisor didn't ask you what your goals are, or maybe parts of your conversation weren't incorporated into your plan, or you didn't clearly say what your goals are for a number of reasons. We'll talk about those reasons in a later episode.  Now is the time that I talk about what a financial plan should do for you - you, the client.  A good financial plan should answer your questions and show you your options. What questions should a plan answer? Plans that I've done for clients answer everything from why do I constantly run short of money to how do I buy a new car to really complex questions like I'm worried that an inheritance might be bad for my kids and I don't know what to do about that. I really get all kinds of questions as a financial planner. When can I retire? I think my investment fees are too high, but I don't understand the statement my investment company sends me.

Sara McCullough: (05:20)
I want to renovate my basement into a rental unit, should I do that? I want to get a loan to develop a rice patty farm in Ethiopia or I think the US is going to invade Canada and I want to buy property in light of that. Some of these questions are pretty common and might sound fairly familiar to you. Some of them are not so common. Those last two questions about the Ethiopian rice patty farm and how to plan real estate in case of invasion - those have only happened once in 18 years. If you've listened this far, you should be clear that planning involves a lot of questions. I need to listen to my client's questions and I need to ask questions; sometimes what we say as clients isn't exactly what we mean.  As a planner, part of what I need to do to make your plan relevant to you is to figure out what are you asking me? What do you mean by that question? Most of the questions that clients ask me can be put into one of two buckets. Am I doing the right thing today? And am I going to be okay tomorrow? Let's take some time here to talk about examples of how this happens in my office. I'm going to talk briefly about some general scenarios of families that I've worked with and what happened when we worked together.

Sara McCullough: (06:47)
The first scenario I'm going to talk about is a family with the parents in their early forties and a good income. They're frustrated partly because they feel like they're running short on money every month which they feel guilty about. Statistically, their income is high and they were raised by middle income parents and they can't figure out why they're running short every month. Compounding this, there's actually money piling up in a professional corporation account, and over there, they can't make a decision on how to invest. The money's just sitting there and they have so many goals. This fact is compounding that guilt that I just mentioned, and it's a fairly common issue for some people. When they met with me, they handed me the binder containing the plan that was done by a potential investment advisor. And they said, here take this, we met with this person, we don't have any more answers than we did before that meeting

Sara McCullough: (07:38)
  We feel like we're missing opportunities and we don't want to feel stuck anymore. So what happened here?  Was the plan in the binder wrong? Was it awful? No, it was just generic. It focused on what would happen if the client saved the same amount every year that had been piling up in the corporate account. But instead of letting it sit in a bank account, that money was invested with the advisor, that plan talked about tax rates, saving and paying for the kids' post-secondary education and it also showed an estate projection. And then we get to the first big myth that I want to tell you about; the myth that clients care most about investment returns and taxes, and that a graph showing a surplus will answer all of the client's questions. So what that binder plan missed was that the clients don't want to save and invest the same amount that's been piling up in the corporate account every year.

Sara McCullough: (08:37)
They have a list of other goals. So that's the am I doing the right thing today bucket. They knew that money in a bank account isn't the best option, but they didn't know what else to do. So that plan in the binder did tell them what else they could do; there was a sample portfolio included but there were other things that the family wanted to do today that hadn't been reflected in the plan. They have school and activity costs for their kids now. And remember I said, they were running short on money some months? So how could they save the same amount like the binder plan said? Every time they thought about taking some of that money out of the corporate bank account and spending it today, they jumped into that second bucket are we going to be okay tomorrow? The binder plan couldn't answer that because it hadn't included their today plans.

Sara McCullough: (09:30)
And it certainly didn't include any dreams. When I asked about potential career changes, one of the parents looked surprised and said, it's funny you ask. And I thought, no, it's not funny. That's just 18 years of experience. So how to solve this family's mix of today and tomorrow questions and show the solution in manageable steps so it makes sense to them day to day.  We started with the things that occur most often, breaking down spending into categories.  For all of you who just reached for the pause button there, don't worry it wasn't a budget.  Budgeting, in the traditional sense, works for so few people that I don't use that method with my clients. I broke out their annual spending based on their priorities. It was clear that more money needed to land in their personal bank account. We talked about paying more tax, what that would look like and what the accountant needed to know.

Sara McCullough: (10:27)
Then we talked about investment options. Most of that cash in the bank account was going to go to long term savings; and investing is the best option, but how, and with whom?  One of the clients really wanted to understand the full range of options from passive DIY investing to working with an investment advisor; and to be clear, the binder-giving advisor wasn't off the list as a potential investment advisor; his skills were just in the investing space not the planning space. Then I did an initial retirement projection for them that included all of the today things with a recognizable amount of spending used. In other words, the amount that we had worked out, that they actually wanted and needed to spend annually. They had enough to do what they wanted to do today and be okay tomorrow. Now they had answers in both buckets. Now we can get into the really big dreams like career changes, charitable ventures, and gifting to families. Did I make that sound easy? It's not.  What you heard was a lot of conversations, a lot of back and forth, and a number of scenarios that I worked through with these clients.

Sara McCullough: (11:49)
The next scenario, I'm going to talk about focuses mainly on maintaining and expanding. This couple is retired with a very secure retirement income. In fact, their investment accounts get slightly larger every year. The pension income coming in is higher than their spending. Their questions aren't related to the typical, what rate of return do I need to maintain my retirement income line of thought that some of you may be familiar with. This family has a fairly complex estate. There are assets and family in both Canada and the US. They've worked with lawyers on both sides of the border for their wills. In broad strokes, their estate isn't being collected into a single estate bank account and then divided among their children. Because of the border issues certain accounts or assets have been named to each child. My role is to review regularly to show the clients based on their will instructions what dollar amount would each child receive when the estate is settled? There will has been in place for approximately six years now. Last year was the first time that the projection showed that the dollars were likely to be unbalanced between the children. Together we looked at options and generated a list of questions for the estate lawyers, the accountant, and the investment advisor.

Sara McCullough: (13:12)
This couple would also like advice on how to give more to charitable organizations. They have supported a number of organizations over the years, both with dollar and time donations. They have a general sense of wanting to give more, but they don't know where to start. Our conversations here so far have included both me updating their projections to include a higher dollar amount given annually and conversations about clauses that are important to them personally. And that's where we get to the second myth, that once a client has a plan it doesn't need to be revisited. We all change. We have new questions and we dream new dreams. Reviewing and revisiting plans with clients has had amazing outcomes for my clients over time, in all areas of their lives. It's so exciting for me to hear clients say; we wouldn't have considered this if we hadn't had this conversation with you years ago about our plan. Or working with you, we realized that this was possible and we've decided to.

Sara McCullough: (14:22)
The last scenario I'll talk about today is a couple that came to me with a very specific question. In addition to holding the certified financial planner and registered financial planner designations, I'm also a chartered financial divorce specialist. About 30% of the clients I work with annually are separating or divorcing; part of the work I did for this couple included a look at what would happen if one parent kept the family home and the other purchased a house in the same neighborhood. After talking about the other expenses they had, in addition to the ones that most of us have, like cars, groceries, and clothes; both of their children were involved heavily in expensive activities. It was important to both parents that the kids were able to continue those activities. When I looked at their incomes versus the cost of maintaining the family home for one and purchasing a new home for the other, each parent would be running a slight shortfall every year.

Sara McCullough: (15:22)
And I didn't see that changing as each parent had also been in the same career for an extended amount of time. There was no anticipated promotion. There was no big bonus potential. This was not the news that either one of them wanted to hear one parent finally said during our meeting, but the bank will loan us the money. I agree the bank would loan each of them the money to keep and purchase the houses they wanted. The bank just doesn't care about the rest of the things that are important to this family. That's not the bank's job. The bank's job when issuing a mortgage is to ascertain the risk of someone defaulting. Based on the conversation I had with these parents, over the next three to five years something was going to have to be sacrificed to keep a house. They had already told me what they were unwilling to sacrifice.

Sara McCullough: (16:17)
My role here wasn't to tell them what to do. My role was to show them what was likely to happen if they went ahead with the financial transactions.  They were focused on one purchase, the houses. I looked at the totality of what they said was important to them. This is the third, perhaps biggest myth about financial planning. That financial planning is just about your finances. And that changes in one area of your finances don't affect other areas; either of your finances or your life. Financial planning done well is about so much more than your financials. It's about how to use your finances as a tool to get to the things you value most. It's about building a life that matters to you and to those close to you. It's about seeing opportunities that you thought were out of reach and having concrete plans to make them happen. We've covered three myths today; that clients only care about investment returns and taxes, that once a plan of any sort has been done it doesn't need to be revisited, and a financial plan only talks about your finances, sometimes in little tiny pieces.

Sara McCullough: (17:33)
At the beginning of this podcast I said I would talk about mistakes. I think one of the biggest mistakes we've made as an industry is to use the term financial planning for everything from a sales pitch to a narrow plan related to investment and taxes, all the way up to a comprehensive plan that includes all aspects of a client's financial and goal related life. When I reflect on the stories I just told you, the common mistake was putting the focus on the money not on the people; financial planning done well takes both into account. It's a mix of art and science. So how do we correct this? I think there are several things that are possible. Some are already happening. Ontario is taking steps to regulate the title of financial planner. I'm also meeting more and more younger advisors who are interested in either providing effective financial plans or that respect the skill of financial planning as different and separate from selling and managing products.

Sara McCullough: (18:38)
Regulatory bodies are also having small conversations about fee changes. In my opinion, the fastest way to correct this and redefine the term financial planning is for clients to look for an advisor who will answer their questions, who will show them their options, who will propose different scenarios based on all of their goals and current circumstances, both financial and non-financial. This brings me to the must haves of a well developed financial plan. It must answer your questions, clarify your current situation, give you options and contain advice and steps that you can use to change your life and get closer to your goals.

That wraps up this episode of Sara Makes Sense. Build your plan. It belongs to you, not your planner. See you next time.
 
 Disclaimer: (19:35)
The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include:  Certified Financial Planner, Registered Financial Planner, Certified Divorce, Financial Analyst, and holding an insurance license.