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Financial Planning – reality or smoke and mirrors?
Great question – unfortunately no easy answer – strangely enough.
In its purest form, financial planning encompasses everything from cash-flow management, net worth planning, risk management (all forms of insurance and other risk management
strategies), accumulation planning, investment planning and strategies, through to retirement income planning, estate and will planning – and no two plans will ever be the same – just like snowflakes.
Financial planning, done properly, is a constantly repeating cycle following a 6-step process as follows:
1) Establish the engagement – what is to be done;
2) Gather client data and determine goals and expectations;
3) Clarify the goals and identify key objectives;
4) Develop and present a plan;
5) Implement the plan; and
6) Monitor the plan.
Each part of the plan, as noted in the second paragraph, has its own 6-step process within the overall planning cycle.
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The pre-eminent designation for financial planning world-wide, is the CFP – Certified Financial Planner which, in Canada, is granted and administered by the Financial Planners Standards Council after an extensive multi-part study program combined with a minimum standard of practical experience. There are other designations that also indicate financial planning proficiency that may be granted by other governing bodies – such as the CH.F.C. – Chartered Financial Consultant, previously granted through ADVOCIS – The Financial Advisors Association of Canada, the RFP – Registered Financial Planner and the PFP – Personal Financial Planner – but the CFP is recognised internationally as the "gold" standard against which all others are measured.
Regrettably, some people call themselves "financial planners" – some even have one or more of these designations, but in reality they don't do full-service planning – they use it as a mask to sell products under the disguise of financial planning. These people do everyone a disservice – themselves, the industry, but most importantly, their CLIENTS!! Don't be fooled by appearances – don't judge the book by its cover!
A true professional can show you a sample copy of a completed plan. A true professional will give you the names of clients that you can call to get a third-party reference of their capabilities and the quality of their work. A quality professional is not afraid to answer your detailed questions about their services, costs, are product sales part of the package or is it strictly on
a fee-for-service, advice only basis where you are free to take the final plan to an advisor of your choice for implementation. There are no right or wrong answers, despite comments from certain media pundits to the contrary – what works for one person or family, may not be suitable for another – decide for yourself! Recommendations from trusted family and friends can help simplify the search for the planner of your dreams!
So who needs a plan and how does this work?
The simple answer to the first part of the question is – everyone – but it isn't really quite that simple. While in the ideal world, everyone would begin to plan as soon as they start their first job, it doesn't happen – why – because early in our lives, other things have a greater priority - fun, toys, travel – and who should be denied this enjoyment?
For most people, once they have begun a maturing process – a committed relationship, children, acquiring a home, more stable employment (even unstable!) and awareness of the future, the concept of having some sort of plan pushes to the fore. There is no set age – and some people go through life happy go-lucky and never have a plan – they live in and for the moment only – paycheque to paycheque – hand to mouth – and they seem to enjoy it. Maybe it is an interesting challenge for them.
As for the process, all true financial planners will follow the same 6-step process outlined above for both the overall plan and for each part thereof.
Cashflow, as an example, looks at every dollar coming and going out – not just amounts but the timing of the transactions and the reason behind them – particularly on the expense side of things. They are also categorised by the reason for the expenditure in addition to being sorted into discretionary or needed lifestyle costs. Rarely, if ever, do the income and expenses balance during the first run-through! Usually the outgo exceeds the income and this is where cash flow expands into reviewing assets and liabilities – particularly liabilities.
Items such as carrying credit card balances, financed purchases for things like vacations, toys and other fun things – they just slip through the cracks easily – but they all impact on our finances. Many of you will have seen the results of a study that was released in late September of 2012 where it appears the average Canadian makes "impulse" purchases in excess of $3,200 per year – I think that is actually quite a low number based on my own experiences as a planner. Think about the double, double with chocolate sprinkles and caramel sauce every morning on the way to work – they add up very quickly! Plans are made, checked, adjusted, re- made, adjusted until the results are both achievable and realistic – and they have to be YOUR objectives and plans.
This same level of detail is applied to every section of the financial plan until it all fits together – rather like a giant jig-saw puzzle with hundreds of pieces. I chose Cash-flow as an illustrative piece for the simple reason that unless there is some positive flow of money, the rest of the plan can never be accomplished!
A final point, once begun, financial planning never ends – that is if you want to achieve your goals. Our lives change – certainly annually and many times more often than that. Our targets are constantly shifting based on our own perception of reality, the impact of career and family changes, our wants or state of health and those of our immediately family.
Think of the process behind NASA sending Curiosity to Mars. If they aimed directly at Mars, they would miss behind it and billions of dollars would be wasted to say nothing of the thousands – perhaps hundreds of thousands – of person-years of work that went into the project. NASA inter-planetary ships are making constant course adjustments as they travel – and we must do the same.
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