How to go about financial planning

With Financial Planning Week (Nov. 17 to 23) fast approaching, I thought it would be a great opportunity to discuss what financial planning is and the criteria you could use to choose a qualified financial planner.

With Financial Planning Week (Nov. 17 to 23) fast approaching, I thought it would be a great opportunity to discuss what financial planning is and the criteria you could use to choose a qualified financial planner.

Let’s begin by defining financial planning.

According to the website Investopedia, it is “a comprehensive evaluation of an investor’s current and future financial state, using currently known variables to predict future cash flows, asset values and withdrawal plans.”

A lofty definition, but what does this really mean to the average person?

First, it means that a financial plan must be comprehensive in nature, taking into account both your current and expected future financial situation.

Second, and perhaps more important, financial planning is a predictive tool that can be used to give you an idea of what future cash flows, and the assets to generate those future cash flows, you will need to reach future goals, be they retirement, buying a new home or paying down debt — to name just a few common goals.

When making a financial plan you are really trying to project where you want to be in five, 10 or 20 years or more, so your choice of a professional to help you reach your goals is the key to successful financial planning.

How do you choose a financial planner?

In Canada, there are two financial planning designations; certified financial planner (CFP) and personal financial planner (PFP).

I’m going to focus this article on the designation that I hold: CFP.

However, I encourage all readers to seek out a financial planning professional that is a holder of either of these designations.

In Canada, all CFPs licensed to use the “mark” or designation of CFP are required to complete a minimum of 30 hours of continuing education annually, which is subject to regular audit by the Financial Planning Standards Council (FPSC) of Canada.

This in itself is a very stringent guideline, designed to ensure that a CFP is maintaining regular and updated education on trends, and knowledge in his/her area of expertise as a financial planner.

In addition, CFP members must annually sign off that they have reviewed and continue to adhere to the professional code of ethics as published by the FPSC.

Members found to be in violation of the code of ethics are subject to disciplinary action, up to and including denial of their CFP designation.

Another critical factor to consider is what you need in the way of advice and guidance from a financial planner.

If you are an experienced investor, perhaps you may require a planner willing to work with you to refine your plan and act more as a coach.

If you want to develop a financial plan, then you’ll need more than a coach but someone who is willing to explain to you some of the more technical points of financial planning.

In either case, a level of technical expertise needs to be complemented by solid communication skills.

A good way to approach this is to ask yourself whether the potential candidate has a common life experience that will allow him/her to relate to your personal financial and non-financial circumstances.

Planners will tell you that your non-financial circumstances have a much larger impact on your financial circumstances that many customers would like to admit.

So having someone that can listen to and understand the nuances of what you are saying, and how it is connected to your non-financial circumstances — for example, starting a family or changing careers — is extremely important.

This only comes from working with a financial planner who can relate to your circumstances.

Once you have found a planner who is aligned with your needs, you will need to understand how he/she is compensated.

In general, financial planners are compensated either in the form of commission for products or services sold, or on a fee-for-service basis. Commission-based financial planners work to provide you with advice based on your needs, but are paid in commissions for recommending products and services that should be aligned with your long-term financial and non-financial goals.

Full disclosure of fees and commissions are required of commission-based planners. Don’t be afraid to ask for clarification of how and when fees and commissions are paid.

Fee-for-services planners are usually compensated directly by the customer. The fee for creating the financial plan is paid by you, and you are responsible for implementing the plan.

This is essentially you managing your investments, and the total financial plan, according to the plan created for you. If you are an experienced investor this can be a good option, but keep in mind that it will require a lot more work on your part.

Finally, keep in mind that a financial plan needs to be comprehensive. In other words, a financial plan is not just about investing, it needs to include a review of will and estate planning needs, including a living will and powers of attorney.

It should also include personal risk management, with a view to optimizing life, health and disability insurance needs so that you and your loved ones are protected in the event of disability or death.

If you want to learn more about financial planning I recommend you visit the FPSC’s website at www.fpsc.ca/financial-planning. And remember Financial Planning Week (http://financialplanningweek.ca/about-fpw).

Easy Money is written by Patrick O’Meara, a former instructor at Red Deer College’s Donald School of Business, who is now chair of finance and accounting programs at Centennial College in Toronto. He can be reached at theinnovativescholar@gmail.com.

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