Do you work with a financial advisor but still have many questions about your money that you’re not getting answers to? Maybe you wish you had help reviewing your cash flow, creating a budget, understanding your group RRSP, employee stock purchase plan, or how your stock options work.
In the past six years running Kind Wealth, an advice-only wealth advisory business, I’ve spoken with hundreds of Canadians seeking financial advice even though they already have a financial advisor. Why is that?
One primary reason is that the financial services industry conflates two very different services — investment advice and financial planning — and puts them under the same umbrella of “financial advice.” People who go looking for help without realizing this distinction may end up with an advisor providing investment management when what they really wanted was financial planning.
What better time of year to get clear about the financial help you need than Financial Literacy Month? Let’s dive into the distinction between these two services.
Financial planning vs. investment management
Simply put, an investment advisor helps you answer the question, “How should I invest my savings?”
If you’ve worked with a financial advisor before, I’ll bet this will sound familiar. They’ll ask you to complete a risk tolerance assessment, recommend an appropriate asset allocation, and detail specific investments you should make (e.g. certain stocks, mutual funds, or ETFs). They’ll also help you understand which types of investment accounts to use (e.g. RRSP vs TFSA).
In contrast, a financial planner helps you answer nearly every other question you might have about your money. Their job is to help you set clear financial goals and make the best money choices to ensure you reach those goals.
While some investment advisors also offer comprehensive financial planning, many only dabble in it. In fact, very few advisors even hold the requisite credentials. According to FP Canada, there are about 17,000 Certified Financial Planners in the country. But with well over an estimated 100,000 financial advisors across Canada, this means that four out of five advisors don’t have the proper credentials to deliver financial planning. And among those who do, many just don’t have the time, tools, or experience to provide it in a comprehensive way.
Most people I meet don’t know what financial planning is or how it can help them navigate and prepare for many of life’s financial ups and downs. And it’s something I wish more Canadians understood.
How financial planning can help you
Imagine you’re setting sail on a long journey. Initially, you set a course based on your destination (your financial goals). But as you sail, the weather (your financial circumstances) can change. Obstacles like icebergs (unexpected expenses or setbacks) might appear, or you might discover new islands (new goals or wants) you want to explore. Without regularly checking your compass and adjusting your course (ongoing financial planning), you could end up off-course or even stranded.
Financial planners take a more holistic approach to helping people with their money, usually in the following areas: financial management, investment planning, tax planning, retirement planning, risk management, estate planning, and corporate planning. Here’s how each of those areas applies in practice:
Financial management (energy)
Think about financial management as your energy. The income you generate can be used in healthy or unhealthy ways. Paying down debt, setting aside emergency savings, and investing can help grow your wealth over time. A planner can help you better understand your net worth, income, expenses, and ability to save, spend and borrow.
Investment planning (growth)
While financial planners don’t provide specific investment recommendations, they will help you understand how to structure your investments based on your unique circumstances/goals. They can also recommend an appropriate asset allocation and which accounts to use to grow your money.
Tax planning (contribution)
Paying taxes is how we contribute to the communal good. Our goal shouldn’t be to avoid paying what we owe. Instead, tax planning focuses on legally reducing or deferring your taxes. There are a variety of strategies available based on your circumstances. Generally, the more wealth you hold and ways you hold it, the more tax strategies are available to you.
Retirement planning (freedom)
These days, we tend not to think of retirement as the day we stop working once we turn 65, but rather the financial freedom to no longer need to work. Planning for this requires calculating whether your current and planned savings will be enough to fund your desired lifestyle in retirement. These calculations are complex. A financial planner can project expected rates of return on your investments, and account for the impact of inflation and tax rates, as well as your entitlement to Old Age Security and Canada Pension Plan payment. Retirement savings must be carefully monitored as circumstances change over time.
Risk management (security)
Risk management involves taking active steps to protect you from unexpected financial loss due to things like death, health issues, property damage, and so on. This may involve various forms of personal insurance (life, disability, critical illness, annuities, etc.) and reorganizing your corporate structure (for business owners) to limit your liability.
Estate and legacy planning (legacy)
Estate planning focuses on what happens to your money after you die. This involves creating a will to detail how you want your assets divided, and establishing legal guardians for any dependent children you have. A financial planner will help you think about your estate goals and understand what options you have, how to simplify the administration, and how to reduce taxes and fees on your assets after you pass.
If you’re a business owner, you’ll want to consider how your personal and commercial finances intersect and contribute to your long-term personal goals. Many of the areas discussed above apply to business finances, too. You’ll want to find a financial planner who specializes in working with business owners, since these strategies may not be familiar to all planners. Corporate planning advice comes in particularly handy when you’re planning to exit or meaningfully expand your business.
How to find a trustworthy financial planner in Canada
Given the alphabet soup of titles that exist in the financial advice industry, it can be hard to figure out where to turn for help. If you want comprehensive financial planning, search the internet for terms like “advice-only financial planner” or “fee-for-service financial planner.” (You can also search www.adviceonlyplanners.ca). This will help you zero in on a small but mighty community of independent professional financial planners who don’t sell any financial products but instead sell their advice for a fee.
Conversely, a more traditional advisor working for a bank or insurance company may be pressured (or directly compensated) to sell you financial products in the process of giving you advice (e.g. selling you insurance or a mutual fund). While you may still get good advice from these folks, it makes it much harder to trust them with this conflict of interest at play.
Whatever direction you decide to go, interview two to three qualified individuals and compare and contrast their approaches. Here’s a list of questions you can ask during an interview to help decide if an advisor is right for you. And if your spidey sense tingles during the meeting, keep searching. Trust your gut and find someone who makes you feel comfortable.
If I had one wish this Financial Literacy Month, it would be that all Canadians understood the difference between these two important services and felt empowered to get the help they’re looking for from a professional they trust.
Personal Finance Expert
David is WealthRocket’s personal finance expert. A chartered financial analyst, he’s worked in various roles across the financial services industry in his 25-year career, with organizations such as Morningstar, TD Canada Trust, and Origin Capital (the impact investing division of World Vision Canada).