Worried Young Couple Lying On Carpet Calculating Their savings, planning future, retirement fund

A fulsome financial plan should be the cornerstone of every client’s investment portfolio, yet it remains difficult to convince some investors of the need for complex, holistic mapping.

Part of the reason is client confusion about the differences between a financial versus investment plan, said Christine Van Cauwenberghe, head of financial planning with IG Wealth Management (based on Winnipeg). The two are closely related, she explained, but a financial plan must come first, have more than “just the bare numbers” and consider all the risks that an investor faces.

“People know what an investment plan is because as soon as you open some kind of online trading [profile], you have an investment account,” Van Cauwenberghe said. Once they deposit money, choose products and start earning a return, “they think that’s a financial plan and may even do some of their own calculations on a spreadsheet, but they don’t know what they could be doing differently with, for example, tax planning or estate planning.”

While many advisors more clearly understand the role and depth of financial plans — due to their industry training and planning designations — they need to recognize this client issue and explain early on why they need to cover more questions and collect “a much longer list” of documentation for crafting such plans, she added.

“Financial planning is complicated,” Van Cauwenberghe said, involving full teams that can include lawyers, accountants and other experts that are required to ensure advice is “elevated.”

The advisor’s perspective

Building a financial plan is “the heaviest component” of a client’s profile, said Leanne Kohtala, a portfolio manager in Timmins, Ont., with Your Plan by Kohtala Financial, Manulife Securities Inc.

Not only does it involve goal setting but also stress testing and finding a way to “bridge the gaps” in a client’s budgeting, debt management, tax and estate planning, and retirement saving efforts, she said.

When contrasting the two types of planning, Kohtala suggested helping clients visualize the differences: “If we said financial planning is ‘Where do you want to go and when do you want to get there?,’ then investment planning is ‘What vehicle do you take?’ I personally couldn’t put together [the latter] if I didn’t have the financial plan already done.”

Another tactic is having investors grade themselves on their planning knowledge when you first meet. Using the A to F system, she finds most people give themselves a C to an F grade, but that their knowledge improves within the first year.

“It’s not that I want them to go off and do this on their own, but I say, ‘I need you to be at a certain level so that we can have really good conversations about your file.'”

Edward Simpson, investment advisor in Montreal, Que., with Mandeville Private Client Inc., also uses the travel analogy with clients, noting that his planning process is based on five pillars, and investment planning is only one of those.

From cash flow analysis to corporate, tax and insurance planning, Simpson said all of his clients have separate financial plans and investment plans. From there, he can suggest one of three portfolio models that are segmented by asset size.

He also tells clients that “the [financial] plan is not static,” setting up the expectation that it will evolve alongside their lives. “We update the plan every year and put the [investment performance] numbers in,” which allows for regular comparisons between current performance and where someone expected to be —  and that can help calm a client’s nerves if jittery markets are scaring them despite positive long-term returns.

So, while the discovery process can be overwhelming for newer investors or those who haven’t worked with a comprehensive advisor before, Kohtala said, she and her team maintain “a high requirement for information.”

Often, you’ll have to ask for “more details than have ever been asked for before,” and that can cause some prospective clients to “drop off the radar,” she said. But what you want is those “who are willing to play ball.”