October 24, 2009


If you don't know where you're going, any road will take you there. --- Lewis Carroll

Do you plan before you start or start before you plan?

When discussing finances, some advisors feel you must have a comprehensive financial plan but most recommend piecemeal solutions. You'll find background on Million Dollar Journey where a financial planner laments that Most Financial Planners Don't Plan Finances. Read the comments too.

Some financial planners get overzealous. They feel their way is the "right" way and look down on other advisors. You see similar divides in the Mac vs PC camps and the Microsoft vs Google groups. How unproductive.

Can you save for retirement without knowing how much retirement income you need? Certainly. You might not save the "right" amount but you're moving in the right direction.

Planning To Fail
Here are the problems with financial plans
  • they are expensive
  • they are boring
  • they are wrong
But they are better than nothing. You'll guess wrong on critical assumptions like investment returns, inflation and how long you're likely to live.

No Customers
You'll find financial planners who would eagerly prepare financial plans for a fee. They have trouble finding paying customers. A financial plan typically costs $750 to $5,000 plus ongoing maintenance plus tax . Do you get your money's worth?

You wouldn't pick a laser eye surgeon solely on price, but what about a financial planner? Are you paying for the expertise of the planner, as you would for a surgeon or are you paying for the hours they spend developing the plan? How can you judge the quality and relevance of the plan?

Slow and Painful
Financial planning is much like visiting your doctor for a physical. You answer questions, submit to tests and then get told to eat better, sleep more and exercise more. You already knew that. Will your behaviour change even if you're heading for trouble?

To get a financial plan, you sit down with a financial planner and perhaps an assistant who takes notes. You answer questions for what feels like hours ... and is. You leave your financial records (e.g., tax returns, bank statements, insurance policies, investment statements, etc). The assistant inputs the data into financial planning software (generally an Excel spreadsheet) which the planner reviews. Weeks later, you come back to review the plan, which may induce drowsiness. You'll find out what's wrong with your financial life and get recommendations in a thick, nicely bound report. By coincidence, your financial planner can often sell you the suggested products (their main source of revenue). You'll likely buy because you've already spent so much time and perhaps money too.

Because the process is painful, you probably won't get a plan from another advisor for comparison. You're less likely to switch advisors later. So financial plans are an effective business tactic.

Financial plans can be tough to grasp and we're in a world where financial literacy is a concern. Basics like how compound interest works aren't well understood. We're not known for making rational decisions either.

Ways to Pay
You can pay for financial plan in several ways
  1. money: which may be refunded if you buy the recommended products (like a refundable deposit)
  2. no fee: the advisor gets paid for selling the recommended products (which creates a potential conflict of interest)
  3. free: as a reward for being a large customer (you're already paying for other services and this is a way to coax you to buy even more)
How Plans are Developed
Like tax returns, financial plans are developed using software. You'll find three categories
  • sophisticated commercial grade: e.g., FP Solutions, Naviplan (can be difficult or cumbersome to use)
  • simplified: generally point out deficiencies with your insurance or investments (which the planner can help you rectify); might be unique to the firm
  • proprietary: developed by the planner but not as well tested as commercial grade software
I've had FP Solutions Business Edition for years. This is extremely sophisticated tool costs $1,335 a year (plus tax). Since I didn't know how to develop financial plans, I got training (live, webcast and prerecorded). I rarely use it, though. I offered to develop free financial plans with advisors but got no takers. Zero.

Evidently, life goes on without financial plans.

Financial planners boast about their financial plans, but they're reluctant to show them. They certainly don't want competitors to see. Why this fear? A finished plan doesn't look distinct. I've seen dozens. They're generally
  • printed in colour on nice paper (though internal drafts may be in black & white on cheap paper)
  • include graphs and tables
  • in nice binders or bound with Cerlox or wire spines
  • have an executive summary because of the length
  • dozens of pages (though most of the content is generic)
You can't see the wisdom that went into developing the plan. You just see the printed result and wonder about the value.

The Real Reason
In the classic book Selling The Invisible, Harry Beckwith points out that our "financial" matters are private and sensitive. Also "planning" sounds tedious and difficult. Acting on the plans shackles our freedom. Now combine "financial" and "planning". Is it any wonder that financial planning and financial planners get ignored. What do you think?


Misty said...

i dont feel i need an advisor to help me plan or save my money. I know the comfort level i want to be at and how i want to live once i retire so i save accordingly. Its that simple to me.

Promod said...

Thanks for your comment Misty.

Congratulations for knowing your goals and having the self-discipline to reach them.

Heather said...

Its really surprising that most people dont take advantage of a financial planner. I did and it was a great decision. By the way, that quote is great!

Chezka Aguila said...

True. lot of people are ignoring how to handle their finances well they don't plan their business well because of some decision making which leads to falling of their business so it is better to take some Financial Services Training don't just jumped into conclusions it takes time learn and study.