If I were looking for a financial planner I would want to know this

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If I were looking for a financial planner

– I would want to know this

By: Susan Mallin, Certified Financial Planner

Contact susan.mallin@steinbergwealth.com 416- 485-0303 or 1-866-876-9888

Susan Mallin is a Certified Financial Planner and Chartered Investment Manager with over 17 years of experience. She is also knowledgeable in cross border issues for US citizens living in Canada, as well as Estate Planning for Canadians.


If I were looking for a financial planner – I would want to know this

The financial planning industry is not highly regulated and therefore a wide array of competencies exist between planners across Canada. If I were looking for a financial planner, I would want to know the differences between planners and the different types of financial planning that are available in order to choose what is best for my circumstances.

In any profession, experience matters. The more financial plans a planner does, the more they know, and what they know is likely more relevant and more current. Many people in the financial industry, from bankers, insurance sales people, accountants, mutual fund sellers, and investment advisors offer various financial planning – as a side job. In other words, it is used as a tool to find sales opportunities, or conversely (and hopefully) as a beneficial value added service. In order to get real value from a financial planner, one needs to know whether or not the person who is purporting themselves as a financial planner is sincerely interested in your financial well-being, or if they are just going through the motions for whatever else is motivating them. Unfortunately, too often the motivation is to find a slot to fit some financial product into, which is the wrong kind of financial planning. The priority placed on the products instead of the person, can have serious consequences to the long-term outcome of the originally desired objective.

There are several elements to a good financial plan. Understandably, not all plans are alike and depending on the individual, a plan can focus on specific elements – such as retirement, estate planning, cross border, investment aligning, among others. But the biggest mistake most people and financial planners make is letting the plan gather dust, never revising it (even under changing circumstances) – rendering the plan completely useless.

Financial plans are chock-full of mathematical projections and assumptions in order to offer a peek at what the future looks like. However, if these assumptions (often referred to as variables) do not get validated as fact as time goes on, the financial plan ends up looking more like an old exercise in financial fantasy. Therefore, it needs to be updated at least yearly to stay within an appropriate band of accuracy. A continuing 1% deviation in an assumption will create a dramatic difference in the outcome over a long period of time.

The most common variables in a financial plan, that when left un-updated, are prone to cause failure:

1) Investment rate of return

2) Tax changes (tax credits, dividends, marginal tax rates, tax sheltered accounts)

3) Law changes (such as trusts, income splitting, estate rules)

4) Government benefit changes (OAS, CPP, age eligibility, Claw-back threshold)

5) Personal health changes (increased costs of personal care affecting future withdrawal rate,

shortened life, insurance ineligibility)

6) Family changes (Divorce, death, 2


marriages, adoptions, babies, grandbabies)

7) Cash flow (failure to follow the savings plan or spending budget, income loss or fluctuation)

8) Inflation (not making investment changes coinciding with inflation rates, underestimation, errors

in forecast budgeting)

It is good practice to conduct “what if” scenarios on a financial plan to test for potential changes to a few variables, such as living longer, purchasing another asset, gifting money to children early, having too big of an RRSP, not having enough in other accounts, etc.

Assets and Performance

The most common assets used for liquidity to fund an eventual income stream are investments within an RRSP, TFSA or other accounts. A financial plan will include a projected rate of growth for these assets. One should not pull a number from thin air nor simply rely on a rule of thumb from a textbook. Considering that these liquid assets form the biggest part of future income, getting them aligned properly is extremely important. Of course, predicting the rates of return in the market is a difficult feat and planners knowledgeable in risk tolerance and


risk/return expectations of various asset classes tend to use return projections that reflect better on the reality of an individuals’ actual portfolio mix.

Updates and Reviews

There are differing opinions on the frequency of how often a plan should be reviewed or updated. Some say annually, others say every five years. I believe the variables need to be validated each year. Considering that the rate of return on investments is easily calculated each year, there is little reason not to update it within the plan. We know that the time value of money is important to achieve capital appreciation, hence the old marketing mantra “buy and hold” or “tuck it in your RRSP and forget about it”. However, holding onto expensive (fees) or mediocre investments for a long time will make things much worse and could derail an otherwise secure financial future. In fact, by updating performance each year, it keeps everyone honest, including having a more accurate financial plan that can actually be relied on. It also gives an early warning signal of appearing problems to address. Without updates to the plan, the longer performance falls below the projected rate of return the harder it becomes to repair the resulting deficiencies.

An example of planning gone bad

In a simplified situation, I use $500,000 worth of investment assets for a couple that is within 10 years of planned retirement and who want $72,000 in after tax income to live on. I test the outcomes of the plan from straying the performance by 1%. If I use an 8% annualized return, it can translate to a full retirement to age 92. However, if I reduce the return by a mere 1% to 7% they run out of money at age 81. The couple probably would have started to realize the mistake somewhere in their middle 70’s and tried to make repairs then. However, the longer a deviance keeps going, the bigger the repair job needed to get things back on track.

Financial Repairs

I cannot stress enough the importance of checking if your assets are performing according to the assumptions in your financial plan. If the assets underperform, and sometimes they will, it should be reflected to test for the amount of damage and ways to mitigate it, if needed. Of course, sometimes the assets will outperform, which can provide a good cushion for potential future underperformance. Make sure your advisor or planner keeps you informed of annual performance and that it gets updated within the plan. There are many ways to fix cracks that appear in a plan – from better cash flow management, to reducing fees, to getting better investment management, to utilizing tax efficiencies, to understanding which accounts to draw money from. The list goes on. However, if the plan sits on a shelf somewhere gathering dust for years, it becomes much harder to fix problems and sometimes the only solution will be to lower expectations and retirement spending (occasionally drastically). Even then, sometimes that is not the “easy fix” because it lowers a person’s risk tolerance, thereby reducing the rate of expected return further each year, sucking them into a dreaded phenomenon called the

reverse compounding effect – like a Venus flytrap – that is nearly impossible to climb out of and keeps sucking

the fly deeper into the trap.

The financial plan should reflect the changes in your life and market swings in order to limit unpleasant surprises, have enough warning to fix potential problems, and for you to understand your financial picture at all times.

Other common financial planning applications

1) Estate planning – how to best structure what you leave behind – such as, tax efficiently, privately,

fairly, quickly, potentially using trusts, or foundations for long-term legacy.

2) Insurance requirements – helps with decisions on how much insurance is appropriate, what kind

is needed and for what purpose such as estate preservation or income protection.

3) Budgeting – current budget to find excess cash flow, or budget forecasting to determine future

income requirements.

4) Taxes – structuring assets to minimize taxes – 2


properties, out of Country assets, US estate tax

potential, snow bird rules, dual citizens, Canadian married to American tax and estate issues.

5) Unexpected expenses – medical costs, long term care facilities, maintaining two households (one


6) Divorce – splitting assets, such as pension plans, or property

7) Sudden loss of capital – such as market loss, theft, extraordinary event.

8) Loss of income – premature need to access investments

9) Early death of spouse

Of course there are many financial planners and none are created equally – so how do you choose? Here is a short list of things to look for in order to help you make a decision:

1) Commission paid planners – Many planners are paid commission only. Even our large banks

hire commission only planners that do free financial planning in order to gather your financial

information, find a deficiency, and then try to sell you a financial product to solve the problem.

This is not real financial planning because of the incredible biases and conflicts of interest. There

is often no follow up, no updating, and no accountability which gives rise to the high propensity

of producing a financial plan rife with errors. Always ask how they are paid as it helps one

understand what’s driving the financial planning process.

2) Fee only, or fee based – If you are concerned about the conflicts of interest from a commission

based planner, consider a fee only planner. However the highly experienced planners can be

expensive which can result in people not returning frequently enough, if ever, for updates. Some

planners also have their Mutual Fund license or insurance licence and consequently may charge a

lower fee for planning as they receive other income from financial products (which makes them

fee based, not fee only). Some fee only planners are also accountants that have a good handle on

the tax portion of a financial plan, while others may or may not have enough knowledge on the

investment portion. If you prefer to go the independent route, it’s best to interview a few to

ascertain where their strengths are, and if it’s an area that needs special attention within your

personal situation. For instance, if you have estate issues to address, filling out household expense

budget reports is a misdirected effort.

3) Investment Advisors – Often investment advisors (brokers) will offer financial planning as a

value added service. You could receive good planning coupled with good investment advice using

this channel. But, the commission paid advisor may not place as much priority on updating or

focusing on the financial planning process. Investment advisors have ongoing pressure to meet

revenue targets resulting in greater time placed on the commission part of their business. The

software used is usually high grade and the planning is sometimes delegated to the insurance and

estate planner of the branch (who is also paid by commission) on behalf of the advisor. Some

investment advisors place little value on financial planning and prefer to “let the chips fall where

they may” type of planning. The advisors who understand the importance of good financial

planning, are usually capable of doing a good job. Of course, that is, as long as they take the

necessary time for it and the time to update it.

4) Salary based financial planners – Often salary based planners work as a part of a team of aligned

financial professionals, such as accountant firms, legal firms, but more commonly found in

investment teams such as portfolio management firms. In the case of a portfolio manager firm, a

fee is charged based on the corresponding financial assets invested. This fixed percentage fee is

for investments, but is also used to pay the salaries of staff which could include the services of a

tax preparer, but more commonly a financial planner. However, not all portfolio manager firms


offer financial planning, and in some cases the planners are paid by commission or a referral fee.

It’s a good idea to ask. You’ll want to make sure that there is a sincere commitment for ongoing

financial planning well after you have already become a client.

5) Experience – Technology has allowed for vast improvements in financial planning software, but

being able to maximize the efficiencies in planning as it relates to the individual circumstance

takes experience and knowledge. Just like you expect your accountant to be able to add and

subtract, it’s to your benefit if they are up to date on tax laws and are proactive to help you with

strategies on how to maximize tax savings. In this same way, it’s better to have a financial planner

that knows what the results of a plan actually mean and has the capability to handle complex issues

as they arise.

For more information about Steinberg Wealth Management and Financial Planning please contact me by email or phone. susan.mallin@steinbergwealth.com or 416-486-0303

To view my financial planning video or an interview with our firm, please click the links below.

Susan Mallin is a Certified Financial Planner and Chartered Investment Manager with over 17 years of experience. She is also knowledgeable in cross border issues for US citizens living in Canada, as well as Estate Planning for Canadians

This document is prepared for general circulation to clients of Lorne Steinberg Wealth Management (LSWM) and is provided for information purposes only. It is not intended to convey investment, legal, tax or individually tailored investment advice. All data, facts and opinions presented in this document are based on sources believed to be reliable but is not guaranteed to be accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. This is not a solicitation for business. Past performance is not a guide to future performance. Future returns are not guaranteed. No use of the LSWM name or any information contained in this report may be copied or redistributed without the prior written approval of LSWM.