Financial Planning: What is it and where to find it | E001
Full Transcript:
Jason Pereira: Hello, and thank you for joining me for the first episode of the Wisdom of Wealth. My name is Jason Pereira, and I am a senior financial planner at Woodgate Financial, a Toronto-based independent financial planning firm. I'm also a columnist for The Globe and Mail's Globe Advisor, a financial technology expert, podcast host, and the only three-time winner of the Global Financial Planning Award, and I have the privilege of being your host.
Jason Pereira: The Wisdom of Wealth is my little way of helping Canadians with a major issue facing us all, the issue of poor financial literacy. In various polls and studies, Canadians score poorly on even the most basic financial tests. How bad is it? In 2017, an Ipsos poll resulted in 57% of people failing a basic financial literacy test, and these questions were not overly complicated. Some of the results included, 70% of Canadians were not aware that a mortgage term refers to the length of time that a mortgage agreement should be changed, cannot be changed, and instead thought it was the length that the mortgage was spread out over, which is actually its amortization period.
Jason Pereira: 65% of Canadians were not aware that income earned in a tax-free savings account does not have to be reported on your taxes, even though the term tax- free is in the name.
Jason Pereira: It didn't really matter what the topic was. From debt to taxes to investments and insurance., Canadians consistently scored low grades in almost every category across the board on every financial literacy test ever given.
Jason Pereira: Poor financial literacy is a big deal. It costs Canadians millions every year and results in unnecessary interest, penalties, fees, taxes, financial stress, poor returns, delayed retirement, lost opportunities, and that can really add up over someone's entire life and it's only getting worse. Scores tend to be higher for baby boomers and much lower for millennials. In fact, less than one third of Canadian millennials surveyed in this Ipsos poll passed the test.
Jason Pereira: The situation is so bad that Canadians ranked their finances as their number one source of stress, and 68% of all divorces in Canada site fighting over money as the primary cause of divorce. But it doesn't have to be this way. A basic and fundamental understanding of financial literacy concepts can help you and not only make better choices, but also alleviate stress surrounding money in your life. And that is why I'm here, to help you with this.
Jason Pereira: The Wisdom of Wealth is not about making you a professional investor. It's about giving you a fundamental knowledge that affects us all and helps you deal with financial decisions we all face, banking, debt, paying your bills, credit ratings, investing, insurance, retiring, wills and where and how to find the help you need. I will do my best to explain some of the basic concepts and introduce you to other experts on this show so that together we will help give you the knowledge and tools to make better choices in your financial life.
Jason Pereira: So I hope you will not only watch this, but continue to watch regularly in order to better your life one basic financial planning concept at a time.
Jason Pereira: While I'm looking to help, I can't do that much in just the first episode. Many of you may need or want help sooner than later, and don't want to wait a full season for me to finish this show. So to start, I'm going to teach you about financial advice, financial planning, and where to find it. Everywhere you turn, people are willing to offer you advice on anything and everything, and when it comes to money there's shortage of people that are willing to give you that advice. In fact, it's estimated that there's over 100,000 people in Canada that work professionally as financial advisors, but technically anyone can call themselves a financial advisor or financial planner.
Jason Pereira: The 100,000 number I gave you comes from totaling all people licensed to sell various types of investment vehicles, but technically almost anyone can call themselves an advisor or planner, and in most cases those terms are not protected by legislation. Currently, only Quebec has a law limiting who can call themselves a financial advisor or financial planner. Ontario's currently considering legislation as well, and so are a few other provinces, but for now be careful where you seek advice.
Jason Pereira: The terms financial advisor and financial planner are almost used interchangeably, and that's problematic because due to this, most Canadians have no idea what financial planning is or how it differs from basic advice, or how it can be of immense benefit to them. Financial advice generally focuses on one area, and it's typically delivered when you are in the market for certain financial products. For example, advice on mortgages, insurance policies, mutual funds. Financial planning as it is defined by various associations that grant designations associated with planning is a more comprehensive look at the entirety of a client's life and makes recommendations in every major area.
Jason Pereira: One of those associations, FP Canada, outlines that financial planning consists of six fundamental components, financial management, which is basically managing cash and debt; tax planning; asset management, basically writing your investments; risk management, how to limit and control your risk and use insurance when necessary; retirement planning; and estate planning, which is all about making sure your wills and powers of attorney are in order.
Jason Pereira: A good financial planner will not only provide advice on these issues, but will also complete an actual written plan on how you can manage all of these areas in your life and make the most of your financial future, but not all planners will provide you with comprehensive service. Most people need planners because someone recommended them, but don't use a recommendation as a shortcut. That person recommended the planner. They may not have done their homework either. Take the time to speak to multiple candidates, ask them about what services they provide, and ask them to provide samples of their work so you can see for yourself. Also ask them about what the cost of their services is. They should be able to answer that freely and without any hesitation. From there, you should pick the one that is the best fit for your needs.
Jason Pereira: A good place to look for financial planners is to look for those who carry the relevant credentials. Of the estimated over 100,000 advisors in Canada, fewer than 20,000 currently hold a credential that proves they have a fundamental knowledge to advise on all the areas we just discussed. There are dozens of designations in Canada, but the bigger ones are the ones you should look for.
Jason Pereira: The certified financial planner or CFP designation. The CFP is the international standard for financial planning, and as of next year will require candidates to complete educational programs consisting of several courses relevant to that topic and pass a six-hour certification exam.
Jason Pereira: The registered financial planner designation or RFP designation is a Canadian planning designation for financial planners that have achieved a high level of competency and planning. The process of attaining an RFP designation involves passing six hours and submitting a financial plan for peer review.
Jason Pereira: If you're in Quebec, the planification financière, or plan fin designation, is a financial planning designation required by law of all financial planners in Quebec. Certification requires relevant post-secondary degree, professional training, and a completion of a certification exam.
Jason Pereira: There are various other financial designations in Canada, but those are the three most credible and challenging to obtain. A great place to start your search for a planner are the websites that issued these designations. FB Canada, the Institute of Advanced Financial Planners or IFP for short, the Institut Québécois de Planification Financière also known as IQPF, and the Financial Planning Association of Canada or FPAT for short. All of them have a listing of planners that are certified across Canada.
Jason Pereira: Now that we've covered what financial planning is and what to look for in a planner and where to find one, let's talk to an actual planner about what is involved in producing a financial plan. And for that I have asked my colleague Peter Longo. Peter is my associate financial planner at Woodgate Financial, and I welcome him to the studio today. Peter?
Peter Longo: Hello.
Jason Pereira: Thank you for joining me.
Peter Longo: No problem. Anytime.
Jason Pereira: Good. So I want to talk to you about the process of financial planning in general. So specifically, let's talk about what's involved. Once a client has said, "Yes, I wish to obtain your services," what's the next step that we go through?
Peter Longo: So generally we would first send them a questionnaire. It's the financial planning questionnaire, which details pretty much everything we're looking forward to create the plan. So we're sending this long document. It gets a little tedious, the amount of information they have to provide, but the more detail that we get, the more accurate the plan we're going to create.
Peter Longo: So once we send them this form to fill out or this questionnaire, then they will provide all the information. So basically all their personal information, any documents that they have to provide. We want to know their tax returns, we want to see their mortgage statements and investment statements. And then of course there's the qualitative factors like their objectives, what they want to accomplish with this plan. Do they want to purchase a cottage, do they want to purchase a home down the road and whatnot. So essentially at this stage, what we're doing is we're collecting data.
Jason Pereira: And this might be a little bit on nerving to some people because they're basically giving us their entire financial lives.
Peter Longo: Pretty much, yes.
Jason Pereira: And the one thing that's important for everyone to know is that we are held to strict standards of confidentiality. And frankly not only by our associations who grant us designations, but also by law. So we take privacy very, very seriously and we do not share that stuff with anyone else. So that information is solely to you. So once we have that, basically what's the next step? You know, you asked them to talk about goals. So we've determined goals, right? We know what they want to accomplish in life, probably retirement, putting kids through school, paying off debt, maybe some vacations, maybe a cottage, all that sort of stuff. So once we have that, what's the next step?
Peter Longo: So once we've gathered all that data, which is a back-and-forth process because generally we don't get everything on the first crack. Once we achieve all the data, then we start entering it into the planning software that we use. Generally we use two or three different types depending on the complexity of the client. We've entered all the data, we compile it, then we usually get back to them with another set of questions.
Peter Longo: Once we've entered all the data into the plan, there's generally a second stage of questions where we have to ask, "Okay, now that we have the information, just please review it, make sure we're on the right path in terms of your cash flows and the budgeting in general and all of your objectives, that all your goals are listed."
Peter Longo: And then once they get back to us, once again, then we start to really do a deep dive into setting the plan.
Jason Pereira: Yeah, so, and this is a lot of work. I mean, let's be honest.
Peter Longo: Yes, definitely.
Jason Pereira: This is why comprehensive planning is not necessarily done by a lot of planners because it is a lot of front end work. So basically how many hours would you say that would take to do the average plan, for just say the average person out there working a normal job.
Peter Longo: On paper or in behind the scenes?
Jason Pereira: Generally.
Peter Longo: Generally it takes a lot of time definitely. Especially gathering all the data, but even entering and trying to play with the software a little bit to get the best result of the plan. We want to make sure that we've crossed all the I's, sorry, dotted all the I's, crossed all the T's and so on. We want to get the best result.
Peter Longo: Basically what we're looking for is a high number at the end of the plan. So we want to make sure that we've done every strategy we could to make it work.
Jason Pereira: So, you know, and this is a big misnomer, some people think, "Oh, you just put stuff into software and it gives you a result." That's not how it works, right?
Peter Longo: No, no.
Jason Pereira: Really the software is there to basically put everything in one place and allow us to project out what's happening in the future. So what are some examples of strategies we would put in place to help people achieve their goals in a financial plan?
Peter Longo: We generally have a checklist that we kind of go through. First, we want to maximize, get the biggest bang for your buck, let's say. So what is the client currently doing and what could they be doing better? So some clients they're really focused on the mortgage prepayment and whatnot, but they're ignoring the RSP.
Peter Longo: So we'll generally go through the RSP and see what their tax rates are and hit that highest return objective first. Then we go down the list. Let's say, okay, once the RSPs are maximized to the extent that it makes sense, then we start hitting the mortgage or the TFSAs or any other objective, the RSPs if they have children for education.
Jason Pereira: For education?
Peter Longo: For education and so on, yes, and then we go down the list. And then we play with the different leaders too. We don't want to focus on one aspect of the plan. We look at the whole plan to make sure that we're getting the best result for the client. So it's a balance of playing with the different leaders as we said.
Jason Pereira: So end of the day, we're trying to make sure they can not only live the life they want to live, but also do that with a great degree of certainty, right? And one of the things we do is stress testing, right? So you know, it's one thing for your plan to say, "Hey, if you earn this return for the rest of your life, you're going to be fine."
Jason Pereira: But I think we've all seen the markets don't work in a straight line exactly, right?
Peter Longo: Exactly.
Jason Pereira: So let's talk about the stress testing. How do we make sure that if things go wrong, they're going to be okay?
Peter Longo: So we do two different tests, let's say. One is called the minimum required rate of the return test. So we say, "Okay, you know what? You assume that we're not going to achieve the assumption return we use." We want to stress it and say," Okay, well even if you earn a 0% rate of return, will you achieve your objectives?" If they can, then great. Then you can literally say, "Put your money under a mattress and everything will be fine."
Jason Pereira: But you typically don't.
Peter Longo: You typically don't, yeah, of course not, but we want to make sure that if they are not comfortable with the market risk at this point in time, they can always lower it to a more conservative portfolio, let's say.
Peter Longo: And then we go up from there in case the 0% doesn't work, then we start going up the list and we find certain levels where maybe they have to make adjustments in their life. They can't just leave that money in the [GSC 00:14:12] where they'd been doing it for the whole time. They have to move it to something a little bit more that will generate a higher rate of return.
Peter Longo: Another stress test that we do is called the probability of success. So, fortunately, I don't have to do it manually. The software will do the 500 different iterations for me, but it tests up markets and down markets and everything in between.
Jason Pereira: So 500 different scenarios.
Peter Longo: Yes.
Jason Pereira: Of different patterns of market returns. So looking at what happens when things go well, what happens when things go poorly? This is something called Monte Carlo analysis for the numbers geeks out there, but in reality, what we're doing is we're checking to see, "Hey, markets are crazy. They go all over the place. What happens with that happens? Am I okay, right?" And then what's the end result of that?
Peter Longo: Well, generally it will give us probably an excess number, so if it's 100%, well then generally the plan tells us that you don't really have to worry regardless of what markets do along the way. At the end of your life, let's say, there's going to be a number there that you're going to be comfortable with because you have a good certainty of getting to that number.
Peter Longo: Now, if it starts to get into the low 70s, we get a little nervous. Of course we want to adjust the plan for any contingencies. That's where risk management starts to come into play. And then if we get into the low 60s, starting to get into the 50s, then that's when we have to caution the client. That's when we start to put the brakes on and tell them, "You might have to change certain things."
Jason Pereira: At that point there's like a 50/50 chance that they succeed, in which case no one wants a 50/50 chance to succeed at retirement.
Peter Longo: No, definitely.
Jason Pereira: I have to say the most unfortunate thing I see is people running out of money in their 90s, and that's something we try to avoid at all costs. So, we do a lot of projections with this. So I mean we're talking about if a couple comes in, let's say they're in their 40s, we are mandated to try to, or we are suggested that we should be projecting to age 90 to 100, right? So that's a, that's a long timeline. We're talking about, 50, 60 years to project out.
Jason Pereira: So we're literally calculating out the income, the growth of the assets, the tax bills, them taking money out to fund all their goals over that period of time. It's a long time. So that's a lot of numbers and very overwhelming. Let's talk about the end results. So when the client receives the financial plan, what does this look like?
Peter Longo: Well, generally we could make the document to be 150 pages. It would be real long or even longer.
Jason Pereira: No one wants that.
Peter Longo: Yeah, exactly. So we generally try to cut it down to, and sometimes I get a little carried away with my assumptions and so on, so it's a little longer than normal. But about that 30 to 40 page mark where we can give them the graphs, the charts, generally the recommendations is the most important part because that's what we're recommending.
Peter Longo: And then of course the cash flows for the next, we're not going to give you the cash flows for the next 50 years or so, but detailed cash flows that have at least the next five years, maybe 10 depending on the situation, so that you can literally see line by line what we're projecting for your sources of income, your expenses, your objectives, where the money's going to be going and so on.
Peter Longo: So we want to make sure that the client sees what's going to be happening over the short period of time, and then of course the long period of time. So we want to balance them both.
Jason Pereira: So at the end of the day we are providing them with a nice document. I always tell them that the front half is the most important part because it's the basics. The backup half if you want to dig into what number, this is in your 20, knock yourself out, but you know, make it digestible. And then we also give them a presentation. It's like 10 slides, sums it all up.
Jason Pereira: So the recommendations, so essentially really those are what marching orders, essentially action items they got to take advantage of it and want to make the plan happen. But the real thing is that people need to understand too is that planning, financial planning is not a product. It's not a document you're buying from people. It's a process because we can plan for you today, but life changes, like life can change tomorrow, right?
Jason Pereira: So we often say that essentially every three years you should do a financial plan update because you know by then it's probably not, your life is very different than it was three years prior or similar, but different enough. Or if a major life event happens, right. So once we've done the entire financial plan delivery, what kind of events do we see that trigger an update that requires us to do it sooner?
Peter Longo: There's a lot of things. Generally it's some sort of an objective that has changed in a very short period of time. You know, they decided they don't want to buy X house, they want to spend a little bit more on X house, or they'd received an inheritance, or a child might be deciding to go to a different educational program that might cost more and so on. So there's many life events that require us to change the plan. I've changed plans. I know we say we like to update it every three years, but sometimes we've updated it three times in one year, depending on the situation, just because there's been a relative that has passed away or somebody needs financial support and so on. So it just changes the whole plan altogether. And we run a new scenario, fortunately.
Jason Pereira: So one of the great things about having these plans set up is that if something changes tomorrow like you said, we can come back and adjust, and inform people about the implications of the decision. And I think about one case that happened recently with an individual whose employer, his company got bought out. He wasn't happy with the changes happening in his company. And he came to us and said, "Guys, I'm miserable." Remember this case and you know, "I know you said I could retire in a couple of years, but can I do it tomorrow?" And we went in and we tested it and a couple days later got back to them and said, "You're completely secure. You can hand in your resignation tomorrow."
Jason Pereira: And he was so thankful and basically sent off, basically said he was done very politely parted ways, gave them two weeks notice. And he emailed me the next day saying, "That's the first good night's sleep I've had in multiple months."
Jason Pereira: So, you know, it's the little things like that. And those are small good stories, but you know, decisions about changing career, decisions about, "Oh no we had someone gets sick in the family. Can we afford this increased cost of care?" You know, most people just have to worry and wonder and hope that it works out.
Jason Pereira: When they engage a proper planner and do a proper planning process, they can actually know what the reality of the situation looks like. So with that, in terms of the feedback you've gotten from clients, I mean I know what I've gotten, like what are the biggest things that they're grateful for in this process?
Peter Longo: I think a lot of times they're just thankful to have a plan, because a lot of people are going through life just getting to that next stage, next stage, next stage. But knowing three or four or five years out, like if I do X, will Y happen? It just gives them more clarity. It gives them a sense of direction. Okay, I know what I want to achieve and I know how to achieve it now. Okay, sure, bumps might come along the way, but at least I have that path I know that this is the way to go.
Jason Pereira: So Peter, thank you very much for coming in today and helping people understand what the financial planning process looks like and the benefits of it.
Peter Longo: Thank you. It was my pleasure. Thank you.
Jason Pereira: So that's my interview with Peter Longo, my associate financial planner at Woodgate Financial, and that is today's episode. I hope that we helped you understand what financial planning is, where to seek it out and develop an appreciation for how it can benefit you.
Jason Pereira: Before we go, I wanted to let you know about a special segment we will be airing here in the future episodes. I invite you, our viewers, to reach out to us with questions you may have on your own personal financial situation. I would be happy to answer questions on air, but don't worry, your real name will not be used in order to preserve your privacy.
Jason Pereira: Thank you again for joining us for the first episode of the Wisdom of Wealth, and I hope you will join us again as we seek to improve your financial literacy and better your life. Until next time.