Tuesday, 18 October 2016

Financial Planning

For the longest of time, and maybe it still is, financial planning is thought to be only available and affordable to the wealthy group. Perhaps this is one reason why the majority of people tend to defer planning for their retirement until they are in the 40s, 50s or not at all.  The second reason for not requiring to do any financial planning was due to the availability of Defined Benefit pension plans (DB) which promised a fixed monthly income when one retires depending on the number of years worked, pay and the level of benefits.  Together with income from CPP and OAS, one should be able to live reasonably well during their retirement years. Third, most people also associate going to bank and meeting your average investment advisor during RRSP contribution season to invest your hard-earned money as financial planning.

I am here to tell you that all the above are myths.

The financial planning industry has evolved over the years to enable the majority of people to afford some basic financial planning advice for a fee ranging from a few hundred dollars to a few thousand dollars, or percentage of assets. Some companies have provided employees either ‘complimentary ’ or charge a ‘nominal fee’ financial planning advice through a third-party.  I strongly encourage you to take advantage of the offer or ask even if you are not sure if the company offers such services.  Also, make sure that you work with a qualified financial planner, such as one holding the Certified Financial Planner (CFP) designation.

The number of companies offering DB plans have also shrunk as most of them are not allowing new participants to join (or ‘frozen plans’ as the industry calls these plans).   These plans are very costly to maintain and the decline in interest rates have forced companies to contribute more cash into these plans to maintain the benefits. If you are still enrolled in these plans, you are really lucky.  Chances are that you either work in the public sector (you should check out how much pension Stephen Harper, MPs and MPPs  get) or were grandfathered in these plans due to your age and service.

Companies have instead switched to the less costly Defined Contribution (DC) plans where both employer and employees  put in fixed amount each period. Unfortunately, there is no guarantee there will be a pension at the end of the day. Think what happened in 2008 during the stock market meltdown.  If you were retiring that year, your portfolio essentially took at least a 30% hit!  This is another reason why sound financial planning is essential . Obviously, there is no guarantee that  you would not have lost money that year. But a good financial planner would have told you to not sell everything at all cost as the markets more than recovered the losses in the next couple of years.

Truth be told, your average investment advisor at the bank is only interested in getting you to sign up for a RRSP loan to invest in mutual funds with high management fees (in excess of 3% in some cases).  Yes, you do get a tax deduction on the contribution for now, but you would have to pay taxes later when your withdraw from your RRSP.  So, before you even start making any money, you would have to pay interest on the loan (typically at prime +or 2.7%+) and 3% of fees per year. 

You would have to earn at least 6% a year in order to break-even. No wonder, people are always complaining the funds don’t make any money. But they do. The financial advisor is compensated. The senior management of the bank are even more highly compensated.  Everyone except you!   This is why working with a financial planner who can properly review your current portfolio, asset allocation and make the proper recommendation to at least advise you to move your funds to less costly index mutual funds or even better,  exchange traded funds (ETFs) which requires opening a brokerage account.   

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