Throughout the entirety of our clients’ lives, we emphasize the value of financial planning in wealth management.
Total Wealth Planning encompasses all facets of our clients’ lives over different life stages. Planning isn’t a static one-size-fits-all process — it is far more dynamic. In fact, a Total Wealth Plan is an ongoing conversation that evolves throughout our clients’ lives.
In the early stages, the plan may involve budgeting, saving for specific goals, saving for education costs, purchasing a home, starting a family, getting adequate insurance coverage to cover debts/mortgages, and beginning to build wealth. As wealth is accumulated, planning often becomes more complex, and typically involves the use of specialists to develop strategies that are focused on structuring, enhancing, protecting and transferring wealth.
One of our first client conversations focuses on planning and whether clients have a plan in place. As we meet new clients, we know that fewer than 25 per cent have had a comprehensive financial plan prepared for them. In many instances, when clients do have a plan, the plan presented to them is not comprehensive enough to address the complexities of their wealth and life stage.
Our goal is to provide our clients with the opportunity to work together on a Total Wealth Plan that captures what matters most to them and provides a cohesive roadmap to fulfilling their goals.
Most people agree that having a financial plan is important to provide clarity on decision-making and outlining actional steps. We can not stress enough the importance of financial planning. The Total Wealth Plan that we provide to our clients give them peace of mind, as well as greater clarity, in decision making and determining future actions.
Building a Total Wealth Plan
The first step in building a Total Wealth Plan is preparation. The planning process relies on a deep understanding of your financial picture and part of this picture will be determined by reviewing your financial documents. The greater the effort in summarizing and providing these details the more comprehensive and personalized the Total Wealth Plan will be.
Below is a list of financial information we typically request to get started:
• Most recent T1 tax returns
• CRA Notice of Assessment including RRSP contribution limit
• Most recent bank account and investment statements held outside of Scotia Wealth Management
• Personal and Corporate Liability statements (mortgages, lines of credit, term loans, business loans, promissory notes etc.)
• Annual employment pension statement
• Copies of your most recent Will, Powers of Attorney and Health Directives
• Most recent financial statements for corporate entities, if applicable
• Most recent T2 corporate tax returns for corporate entities, if applicable
• Organization chart — showing all corporate entities owned directly, or indirectly — your accountant may have one prepared, if applicable
• Business agreements — Buy Out Agreements, Business Valuation Reports, Shareholders Agreement(s), if applicable
Some of the non-financial items that we require:
• Family tree chart — Details of each family member, including parents, children, siblings, birth date, date of death (if deceased), location and citizenship/residency
• Details of friends and other individuals named in any of the legal documents
• Cohabitation agreements, marriage contracts, separation agreements, if applicable
Budgeting for cash flow
Talking about financial planning would not be complete without a discussion about budgeting and cash flows. Every client is different with respect to the cash flow they will need in retirement. The best way to look at cash flows is to look at the two main categories: periodic and lump sum.
An example of periodic cash flow would be a client who would like a monthly amount transferred from their investment account to their bank account to fund day-to-day expenses. Some have very minimal periodic cash flow needs and others have a higher cash flow need. Only our client can tell us what the periodic cash flow need will be. The range for our clients is anywhere from $0.00 to $25,000 per month.
In these initial stages of preparing a Total Wealth Plan, determining this dollar amount is perhaps the toughest figure for clients to provide us. Some clients choose to have us do the financial plan, and then calculate what monthly dollar amount they can comfortably pull out without running out of money.
Lump sum needs can have a very significant impact on the financial plan. For example, a client may want to purchase a new sailboat, motor home or new vehicles. They might want to gift a lump sum to adult children to purchase a house, or need funds to upgrade the principal residence for a large renovation. We have some situations where lump sum needs are very low and other cases where the lump sum needs are very high.
The more details provided, the better the Total Wealth Plan will be. Examples of the level of smaller annual details that some clients have provided: $500 every month for meals and entertainment (restaurants), $7,500 for club memberships, $10,000 every year for travel. Often, there are larger items that are not necessarily every year, some examples include: $50,000 every six years for a new vehicle, or $40,000 for a new roof in two years time, $30,000 for landscaping, $100,000 for a kitchen and bathroom renovation in three years.
Assumptions within the plan
All financial plans have assumptions that must be used. These assumptions are based on industry standards shaped by our goal focused conversations with our clients. Risk tolerance, investment holdings, family dynamics, and health all factor into the assumptions utilized in your personalized Total Wealth Plan.
Some examples of assumptions that are used in our plans are:
• Inflation Rate — Canada’s inflation rate has ranged during the last three decades from a high of 12.5 per cent in 1981 to a low of 0.2 per cent in 1994. In preparing your financial plan, we typically use 2 per cent to 3 per cent annual inflation for projections.
• Life Expectancy — We project plans to age 95.
• Mixture of income types whether Canadian dividends, foreign income, capital gains, etc.
• Investment returns by income type
• Tax credits available (refundable and non-refundable)
• In preparing projections, we assume that tax rates will not change unless such changes have already been legislated. We also assume that the tax brackets and tax items such as the basic personal amount will increase over time by the chosen indexation rates.
Ability to create multiple scenarios
Often, we will have clients that want to know what a financial plan will look like if they factor in different scenarios or change one or more of the assumptions slightly. The ten most common additional scenarios that we prepare are:
1) Inheritances — Some people do not want to factor in inheritances while others do. Some may ask that we run the financial plan both ways to see the impact.
2) Selling the house — Some people want to factor in selling their personal residence and using that money to fund the later stages of life, others may want to exclude this asset as they don’t ever plan to sell the house.
3) Gifting money to children — Often we have clients that would like to run a scenario with them giving their adult children money, normally to assist them in purchasing a house.
4) Cash flow draw — Typically a client will have done some projections and determined the monthly draw that they would like based on our discussions, they may also ask what the Total Wealth Plan looks like if they pulled a greater amount out.
5) Lower return expectations
6) Higher inflation — Inflation level assumptions are based on longer term trends; we are occasionally asked to input a longer term inflation number greater than two or three per cent.
7) Working longer — Some clients wish to maximize their estate for their loved ones. They may want to know how their overall net worth and estate would be impacted if they did choose to work longer.
8) Retiring earlier — We will typically input the most likely scenario for the retiring date. Sometimes we are asked to run scenarios of earlier retirement, or working part time instead of full time
9) Living longer — Years ago, we would use age 90, today we are primarily using age 95 in financial plans. Some clients have also asked us to run the numbers assuming life expectancy to age 100.
10) Other strategies — Could involve an illustration using an insurance strategy, charitable giving, or some other scenarios unique to the client.
Our innovative team-based approach allows our internal team of specialists to offer a fresh perspective. Our Total Wealth Planners and accredited professionals take the time to understand your goals and life priorities through a deep discovery conversation. These details along with the documents provided ensures the Total Wealth Plan focuses on what matters to you and captures your entire financial picture.
Our team, along with the Total Wealth Planner, work collaboratively with Estate and Trust Solutions, Private Banking and Business, Insurance Solutions, and Family Advisory Services to fully understand your financial picture. Prior to the final Total Wealth Plan being delivered to our clients, our team of specialists review your entire financial picture and collaborate to arrive at strategies that are focused on structuring, enhancing, protecting, and transferring your wealth, and that align to your goals as well as one another.
Final draft version with accountant
Once we have a final draft Total Wealth Plan, we may set up a meeting with our client’s accountant. An extra set of eyes to ensure they understand the strategies and are in agreement with the overall financial plan. This is especially important if our clients have corporations, multiple assets, and protection strategies.
Creating the baseline
Once we have a final comprehensive Total Wealth Plan in place it establishes the baseline and is electronically stored in our computer systems. It makes updating the plan in the future easier.
We encourage our clients to update us on any details of significant change in their life. Significant changes may include family death, marriage, birth of child, inheritance, sale or purchase of a property, significant raise, job loss, health issues, and changes in periodic and lump sum cash flow needs.
Frequency of reviews
Once you have spent the time and effort to create a comprehensive Total Wealth Plan it is important to review the actionable steps. As a Portfolio Manager we initially review the actional steps as it pertains to the investment and financial components of the plan. We also diarize any tasks that are set for the future to ensure they are discussed and actioned.
The Total Wealth Plan is always reviewed on our annual review with clients. Behind the scenes we do a high-level analysis to compare where the client currently is to where we had projected them to be within the plan. The discussion enables us to also obtain any updates from the client — occasionally the updates are material enough where we will update the Total Wealth Plan.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email firstname.lastname@example.org, or visit greenardgroup.com.