Online financial planning and investing tools create new opportunities to save for retirement, but most people still need an advisor to help them develop, and stick with, a plan, says Richard Kingston, a professor and program coordinator of the Humber Institute of Technology & Advanced Learning’s business management – financial services and financial planning postgraduate programs in Toronto.
Q: What is the importance of a financial plan?
Richard: All people who don’t have a financial plan need one because they can then carry on a discussion for the rest of their life and compare what they’re doing to where they should be at that particular stage. If they’re not where they should be, they can take whatever actions are necessary to change course. The worst thing is to be five years out of retirement and realize you don’t have enough money to retire.
Q: How can technology affect that?
Richard: Most banks have rudimentary math engines available online where you input your data and get rough answers. Let’s say you’re 40 and you want to retire at 60. It will show you, if you’re investing x dollars a month for the next 20 years, how much money you’re going to have 20 years from now. People don’t know that just by thinking about it. They’ve got to actually put it through a mathematical program. If that money is not enough to sustain them during their retirement years, at least they’ve got 20 years to fix it. Whereas, if they wait 20 years and then take a look, they end up with not enough money. That’s why financial planning is so critical. You’d be absolutely amazed, if you started asking around, how many people in their 30s, 40s and 50s have not ever done a financial plan. They’re investing, but they have no idea what amount of money they’re going to have based on their investments when they retire. They’re just guessing.
Q: Is it enough to do those online financial planning programs on your own?
Richard: They’re really not robust enough to rely on.
Q: What should people do?
Richard: You can go to your bank, your investment brokerage, your insurance agent. Whoever your advisor is that you want to do this with, sit down and say, “I want to do a formal financial plan.” It’ll handle everything from insurance to investments to borrowing. Computer programs allow financial planners to take a very effective look at the person’s future. The planners would say, “how much money do you want to save?” They put that in, and they put down how much money the individual has currently; then they do a future value to show how much money that person will have at retirement. Then they look at how much the individual wants to spend during retirement. At that point there will probably be a gap between how much that person was able to save over a lifetime and how much he or she needs to have the money outlast them. If there’s a gap, it’s the financial planner’s responsibility to take steps to allow that investor to save more or get a better return on investment to reduce the gap to zero.
Q: Investors have access to all sorts of information they didn’t have before, including highly-detailed company and government reports. What opportunity does that present?
Richard: It depends on what you do with it. If you look at that information and make a long-term decision to buy, because you feel the company has good prospects, that’s great. But then all of a sudden, three weeks later, a piece of bad news comes out that doesn’t really affect the company in the long run – it might have a short-term impact – and if you sell because of that, you have made an incorrect decision.
Q: Is it harder to resist those impulses with the 24/7 availability of online information?
Richard: Absolutely. You’re flooded with all this information. Quite often it will be of a negative flavour, so people’s emotions tend to get the better of them, especially when they don’t have anyone to talk to. In online investing, the people on the other end of the phone are not licensed to give advice. All they can do is direct them to another website for information on that specific security.
Q: What is the answer to that?
Richard: You’ll never find a cure for emotionalism. That’s part of human nature and it will always be the case. At the end of the year when they look at their profitability, and it’s more negative than positive, then those people should be dealing with experienced investment advisors, who can give them advice and calm them down when their emotions are telling them to sell.
Q: To what extent are financial institutions offering seminars to assist those who are doing it on their own?
Richard: They’re available, but the problem with seminars is that pundits get up in front of a group of people and tell them about investing. They don’t know what the risk-structure is of each of the individuals in their audience or their investment goals, so they cannot give them adequate advice. It may be good general advice for some people in the audience, but it won’t be good enough for people who need help. For that, you need to talk one-on-one with the investor.
Q: What about mobile apps?
Richard: All the banks and investment brokerages are getting into mobile apps but you should be thinking about your decisions and not making snap decisions based on the latest piece of news. That’s what gets people into trouble.