FP Answers: What’s the difference between a financial plan and an investment plan?


Don has $800,000 in investments. He wants to set lifestyle goals, but also have a road map to the right investment strategy for the long term

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By Julie Cazzin, with Doug Robinson

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Q: What does it cost to get a financial plan drawn up? What about an investment plan? And what exactly is the difference? I’m 39 and have liquid assets of roughly $800,000 (excluding my house) and feel it is time for me to have both. — Thanks, Don P.

FP ANSWERS: You ask an insightful question, Don. It seems straightforward, but there will be a lot of different answers from different companies and advisers in our industry.

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All too often, an investment manager is hiding in advisory clothing. More specifically, clients have the illusion they are getting a complete plan when they are simply buying a manager’s investments. The confusion this creates leads to great questions such as the one you have asked and fuels a debate about the level of fees charged. In addition, there is a regulatory concern in the industry surrounding this issue, leading to title reform measures for advisers that are intended to provide more clarity for consumers.

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Let’s start with defining a financial plan by what it is not. It is not a 50-page printout from a financial planning software package containing charts and graphs beside templated text written by someone you or the adviser has never met. It is not buying insurance products. It is not being sold a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) in a retail banking location, nor is it a portfolio of mutual funds you buy from a nice person.

A financial plan may involve any of these elements, but an effective plan is one you both generally understand and implement. You don’t need to understand all of it. Typically, very few people want to know all the details. Some people appreciate having everything in writing, but many only want a concise summary and enough in-person meetings to have the relevant points explained in understandable terms.

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A complete financial plan should address all financial planning components:

  1. Cash management plan: income, savings and spending, plus effectively dealing with debt;
  2. Estate planning: having proper wills and power of attorney documents that accurately reflect your wishes, and reviewing asset ownership structures and beneficiary designations to ensure they are not conflicting with these documents;
  3. Investment planning: building an appropriate investment plan that aligns with your willingness to assume risk and considers your need for taking the risk;
  4. Retirement plan: planning how much to save for retirement and spend in retirement, and utilizing the optimal vehicles (RRSPs, TFSAs, corporate savings, non-registered savings) to reach the targets you set;
  5. Risk management plan: it is generally best to use insurance for events with a low probability of occurring, but very severe consequences. Events such as disability or death require income replacement for your family;
  6. Tax plan: every Canadian has the right to organize their affairs to pay the lowest amount of tax possible while complying with the country’s tax code.

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Other planning areas may need to be addressed over a lifetime and include education for children or grandchildren, marriage, divorce, second marriages, multiple families, charitable giving and business succession planning.

A financial plan starts with the planner knowing all the current details about every component and building your net worth statement. But, most importantly, the client and planner need to define each person’s priorities and goals. Unfortunately, doing so is rarely straightforward because most people have not given this task detailed thought or defined their future well. (I don’t even know when I plan to retire.)

You can hire a fee-only planner who will charge for this service, and you may find a flat fee for all the components ranging from $3,000 to $10,000 or more. Some planners offer a component service and may charge for, say, a retirement plan only. Other planners will charge an hourly rate, which will widely vary, but $100 to $400 an hour would cover most of the range.

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Don, you asked about the difference between a financial plan and an investment plan. First, you will note an investment plan is simply one component of a complete financial plan. The price of an investment plan is typically built into the cost to manage the assets. A good asset manager will create an investment plan and charge 0.75 per cent to one per cent of the assets to manage the money. The problem is that fees are often much higher (1.25 per cent to 2.5 per cent and more), and little additional financial planning advice is delivered for that extra money.

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As well, the industry is fragmented. Banks offer cash management and debt financing, lawyers do wills and powers of attorney for estate planning, and everyone offers investment advice because this is where they make the most money. Certified financial planners (CFPs) provide a wide array of retirement planning value, insurance agents prioritize insurance and accountants prepare taxes. Most of these are one-time events, but financial planning is an ongoing relationship that should last years.

At 39, with $800,000 of investment assets (well done), you have enough money to have both an investment and financial plan. The price you pay should not be the focal point; the value you receive should be. A financial planner should have the CFP designation. An investment manager should have the chartered investment manager (CIM) designation or, better still, the chartered financial analyst (CFA) designation.

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I suggest finding a firm with people who hold those designations and who you can build a relationship with for years to come. You must feel at ease with your adviser(s) and trust them, and they need the ability to explain complex issues in terms you understand.

You are on the right track. I wish you success finding the right firm or adviser(s). Set your standards high, be patient and don’t settle until you find the right partner.

Doug Robinson is a certified financial planner and wealth adviser with Veritable Wealth Advisory in Peterborough, Ont. Veritable Wealth Advisory is a full-service financial planning and investment firm that employs multiple certified financial planners and portfolio managers with offices in Burlington, Kingston and Peterborough.  Veritable has advisers specializing in retirement planning, tax planning and estate planning, and most commonly works with professionals, business owners and affluent retirees.

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