The article “When It Comes To Your Financial Plan, Think Process, Not Product” was originally published on Financial Post on June 19, 2019.

Jason Heath: A financial plan is more than a one-time event, and it certainly shouldn’t exist solely in your head

The “financial planner” title is unregulated in every province outside of Quebec. This means financial planning throughout most of Canada is a vague service offering with few guidelines. As a result, it can be hard to know what to expect from a financial plan.

The 2019 RBC Financial Independence in Retirement Poll found that 54 per cent of Canadians reported having a financial plan. This number has remained consistent in recent years, with Ipsos (2015) and CIBC (2017) polls finding the proportion to be 50 and 54 per cent respectively.

One interesting finding in the recent RBC poll was that one in three respondents who reported having a financial plan admits that the plan is just “in their head.” As a financial planner, I always thought these financial plan survey numbers seemed high given how few people seem to have a written financial plan, but perhaps the truth has now come out. That is, not only do many people not have a financial plan, but even many of those who think they do are in reality winging it to some degree. For some consumers, their financial plan may consist of no more than an investment proposal from a mutual fund salesperson or a few speculative stock picks in their discount brokerage account.

FP Canada — formerly known as the Financial Planning Standards Council — sets financial planning standards and confers the Certified Financial Planner (CFP) designation in this country. According to the national professional body, a financial plan should include: investment planning; insurance and risk management; financial management; retirement planning; tax planning; and estate planning and legal aspects.

Of the six components of a financial plan, investments and insurance are the two that are most commonly addressed for consumers. Canadians know they should consider RRSPs, TFSAs and RESPs to build a future nest egg. And most people insure against at least some of the risks of financial loss due to death, medical issues and damage to property.

Financial management and retirement planning are two commonly misunderstood components of a financial plan, while tax and estate planning are two frequently overlooked ones. While they may be less conspicuous components than investments and insurance, arguably, they are more important.

Financial management involves identifying your current net worth (assets and liabilities) and your cash flow (income and expenses). Online banking tools like RBC’s myFinanceTracker and TD’s MySpend, and personal budget apps like Mint and You Need a Budget can make this easier than ever. Beyond determining today’s net worth and cash flow, which you can and should do yourself, medium-term financial management and long-term retirement planning also require forecasting into the future.

The “retirement plan” component of a financial plan should project future income, expenses, taxes, investments, pensions, debt repayment, and other financial implications, the goal of which is to determine and quantify long-term financial independence. A detailed retirement plan may go so far as to model out every dollar in and out of your hands for the rest of your life, holding several factors constant, or stress-testing the results subject to conditions like higher or lower investment returns, increased or decreased spending, early or later retirement dates, and so on.

Financial management and retirement planning help people determine their personal saving targets, what they can afford to spend, and how best to arrange their family’s financial affairs. Retirement planning can quantify how much you need to have saved to retire, and whether your investment risk-return trade-off can achieve your long-term goals. These are situation-specific calculations — not just rules of thumb — that are hard to do on the back of a napkin, much less just in your head.

Tax and estate planning are often overlooked components of a financial plan for a variety of reasons. The business of Canadian tax, for example, has become very transactional, and much less Canadian. In fact, large and small accounting firms alike have been outsourcing parts of their tax preparation processes for years, frequently to India. As accountants have sought to compete with DIY software, discussion and tax planning may be sacrificed for efficiency and pricing.

For many Canadians, their relationship with their accountant is also retroactive, preparing a tax return in April for the prior year. Proactive tax planning to minimize next year’s tax, as well as lifetime taxation and tax on death, are important components of a financial plan.

Estate planning may also be an overlooked financial planning exercise. A 2018 Angus Reid Institute poll found that 51 per cent of Canadians have no will, and that only 35 per cent have a will that is up to date. The thing about estate planning is that it should go beyond simply preparing a will just to check off a box and say that it is done.

In a financial planning context, it is important to consider things like beneficiary designations, joint asset ownership, income tax liabilities, and survivor benefits that may result upon one’s death. In the same way a married couple may plan for retirement together, it is important to consider what might happen if one spouse or the other died prematurely. This may be as much a financial planning exercise as an estate law one.

Since investment or insurance beneficiary designations and joint ownership of assets may cause certain assets to pass completely outside of a well-crafted will anyway, estate planning should be a more holistic financial planning experience, an integral part of which certainly does include wills, powers of attorney and other estate documents.

Financial planning is still very product-centric, with a focus on investments and insurance. A financial plan should also include financial management and retirement, tax, and estate planning. Owning investments and insurance without addressing the other four areas of a proper financial plan is like leaving home for a road trip without a map (or these days, a GPS).

Do you need a professional financial planner to develop a financial plan? Not necessarily. At the very least, aim to maximize the ongoing advice from existing investment, insurance, and tax advisors, or ensure that if you are your own advisor, that you are addressing the six components of a proper financial plan yourself.

Since a family’s personal finances are ever-changing, it is important to remember that financial planning is a process, and not a product. A financial plan may not be something that requires annual maintenance or even necessarily the services of a professional, but it is certainly more than a one-time event that should not just exist solely in your head.

Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.