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ROB CARRICK

The financial plan: Why do so many clients file it and forget it? Add to ...

Apathetic clients are undermining the investment industry’s attempt to make financial advice about more than just picking stocks and funds.

Financial plans are blueprints on which successful investing is based, and an increasing number of advisers are putting in a considerable amount of work to provide them to clients. But there’s evidence to suggest that clients are largely ignoring them.

Dan Richards, a consultant to the advisory business, said he’s seen figures showing clients follow just 20 per cent of the recommendations they receive in their plans.

“It’s a pretty grim statistic,” Mr. Richards said. “There are many financial advisers I talk to who have become a little jaded about financial plans because they invest huge amounts of time and effort, and clients don’t act on them.”

Securities lawyer Ellen Bessner said advisers are increasingly using financial plans to help clients answer questions like how much they need to retire comfortably, and how their debts affect their finances.

But in her experience, clients have not been embracing these plans. “Clients are not engaged, period, whether it is with respect to planning or with respect to their investments,” she said.

A recent court case highlights how financial plans can be as contentious as investment choices and strategies in client-adviser relations. Understanding the role of both parties in implementing a financial plan can forestall clashes over disappointing outcomes and, more importantly, provide clients with peace of mind that they are on track to meet their financial goals.

A case summary supplied by Ms. Bessner described the plaintiffs as a married couple in their 50s who were anxious to retire and had already determined that they could live off an income $35,000 per year. In 1999, they asked their duo of advisers when they could retire and be in a position to draw that level of income until age 90.

The advisers produced a four-page financial plan that used several assumptions to lay out a path to retirement in 2000. Instead of following the plan, the couple put it in a drawer. Years later, after retiring and realizing they would run out of money at some point, the couple was forced to go back to work in jobs that paid them less than they made before they stopped working.

The husband and wife then sued their advisers for income lost as a result of the decision to retire.

In 2011, a judge found in favour of the couple and awarded them damages based on several years of lost income. This past June, the decision was overturned on appeal.

Ms. Bessner said the case offers a lesson to investors who received a financial plan from their adviser: “Either follow it, or contact your adviser when you want to change it.”

Financial plans vary widely in scope and detail, but they generally aim to be a map guiding clients from where they are now in a financial sense to where they want to be in the future. Some advisers include them in the fees they charge for investments, and some may charge extra. There are also dedicated financial planners who only produce plans and don’t handle investments.

Financial plans have become more common with all types of advisers, but Mr. Richards said bank-owned brokerage firms have made them a particular priority. Just 15 years ago, he added, these firms would have dismissed financial plans as being unimportant.

“There has been a 180-degree shift,” Mr. Richards said. “All of the head offices have put financial planning software on every desktop. In training programs, financial plans are more and more being put front and centre as a foundation of the client-adviser relationship.”

Part of this trend can be linked to interest in plans on the part of at least some investors, Mr. Richards said. After losing money in the 2000-01 collapse of tech stocks and the global financial crisis in 2008-09, many people have been looking for broader financial help that goes beyond simply choosing investments.

There’s also some self-interest for investment firms in providing plans, he said. A properly executed financial plan is evidence that an adviser has taken the time to familiarize herself with a client in order to make suitable recommendations. At a time of increasing scrutiny on how advisers conduct business, that’s significant.

Ms. Bessner said the case of the couple who sued their advisers offers some lessons on how to get the most from a financial plan. Most importantly, clients should understand that their plan is not an inviolable document.

If your personal situation changes, as it likely will over the years, then notify your adviser and ask to have the plan amended. A good adviser will thank you for calling about your changed circumstances because it shows you’re taking an interest in your plan.

If you have reservations about your plan, Ms. Bessner encourages you to raise them with your adviser. “People are afraid to express how they really feel to their adviser. But for the plan to work, you need to have your personal values in the plan. If you’re risk averse, then you don’t want to have a return showing what you’d be yielding with a high-risk investment.”

One further suggestion from Ms. Bessner – review your plan on your own at least once per year to make sure it still reflects your needs. You should also have regular reviews with your adviser to see whether you’re on track.

Mr. Richards said the advisers who have had the best experiences with financial plans tend to refer back to the document at every meeting with a client. “It’s taking the financial plan away from being an academic treatise that sits on the shelf.”

Investors who are interviewing a prospective adviser should ask to see a sample financial plan, he suggested. Look at how accessible the plan is, and the range of issues it covers. Then, ask what kind of follow-up the adviser provides.

An odd detail in the case of the retired couple is that they continued to deal with their advisers after deciding not to follow their financial plan, and the advisers themselves never referred to the plan, either. The appeal court rejected the claim that the advisers were negligent, but Mr. Richards said there is still some responsibility on the part of the adviser. When an adviser asks a client to invest the time to prepare a financial plan, there’s an implication that both parties will act on it.

“It’s not actually the plan itself that is going to drive success or failure,” he said. “It’s the commitment level on the part of the client and the adviser, but especially the adviser. The adviser does need to take the lead.”


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A not so simple plan

Cary List, president and CEO at the Financial Planning Standards Council, says a comprehensive financial plan should cover the following points:

1. Management of your day-to-day finances: Your debts, including your mortgage, should be covered here.

2. Investments: Addresses whether your money is invested in a way that’s appropriate to meet your needs.

3. Estate planning: Covers how you want your estate to be wound up when you die.

4. Managing financial risk: Should look at critical illness, disability and life insurance to protect you and your family.

5. Taxes: Ensures your assets, income and debts are structured in a way that ensures you’re paying the minimum allowable tax.

6. Retirement: Answers the question of how much money you will need to retire, how you will meet that requirement, when you’ll retire and what your lifestyle will be.

7. Short, medium and long-term goals: Looks at issues like how often you will replace your car, whether you’re saving to buy a home or thinking of downsizing, and whether you want to help your kids financially.

Source: Rob Carrick

 

Read more from Portfolio Strategy.

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).

 

 

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