Why is traditional Financial Planning Failing you?



About a year ago, one of our Investment Advisors, Brandt Butt, introduced me to a blog called www.behavioralfinance.com. At the time, Brandt had keyed into the fact that good financial advice might not mean the same thing for each individual client and that you must tailor your approach and your plan to fit the needs of each client. The idea of looking at providing advice based on human behavior is something that I had considered many years ago, early in my career, but admittedly is not something that I prioritized, that is until now.


Recently I met with a new client and of the many things we have discussed regarding his planning is the fact that he feels guilty about spending money on the things he enjoys doing. Sound familiar? If so, you are certainly not alone as I have found that it is a common trend among many people. In most cases, once we explore why a person feels this way, we’re usually able to attribute back to the persons history with money. In some cases, it is because the have lived through a period of financial difficulty in their lives, or perhaps they witnessed a parent go through financial difficulty or even mismanagement. Understanding that root cause is incredibly important because only after knowing can we design a strategy that will help you to succeed and most importantly, make you feel comfortable with your financial status. In the case of my client, the root of their guilt goes back to his parents who were high income earners but also overspent every single year. Through witnessing the financial challenges this caused, my client, who is a great saver and a high-income earner himself, now struggles to use his hard earned money to enjoy his life. This is where traditional financial planning has failed him. Allow me to explain further:


To give you a little more background, my client is a young orthodontist who has a corporation and has amassed a sizable investment portfolio. He carries some personal debts on a line of credit and for the most part lives a comfortable lifestyle. What is creating stress for him is that he doesn’t feel like he can afford to do things that he really would like to, especially travelling and seeing the world. This is where traditional financial planning has failed him because all of the recommendations he has received have primarily been geared towards saving money for the long term and retirement. His planning has been so focussed on that one objective that he feels guilty using any of his money to enjoy life today. His original plan was only designed so that his corporation would pay him what he needs to live for regular life but did not factor in the fun extras. On top of that, even if it did pay him more monthly he wouldn’t use that money for the better things in life but instead would choose to reduce his debt in lump sums (which is not a bad thing, but doesn’t do anything to improve this clients overall happiness). Now most planners would look at his plan and say it is successful, but they are failing to recognize that life doesn’t start in retirement, or for early retirees it doesn’t start in your 80s. They are also failing to recognize that my client would likely live the next 30 years of his life underliving his potential when in fact he can really have it all by making a few non-traditional adjustments. For my client the solution seems counterintuitive but will have a tremendous impact on his wellbeing.


To summarize, the first priority we had was creating a “Fun Account” for him. This is an account, personally held outside of his corporation where we allocated $20,000 into. The money is conservatively invested, and we are adding to it on a monthly basis. The $20,000 watermark was chosen because that was what we determined the client needed to have in the account to be guilt free in spending money on themselves. We are building the account up and every once in a while he will take the money out to use it on a vacation or other fun purchases he would like to reward himself with. The key is, the account never goes below $20,000 in value. Traditional advice would tell my client to take that $20,000 and either keep it in his corp. and not pay personal income tax on it initially, or to use it to pay down his line of credit and reduce his interest costs. This probably would be good advice financially, but the better advice for my individual client is to do things the way we have laid out because he is immediately living a happier life. In addition to creating the fun account, we also had to put together a debt elimination strategy and of course plan for building his assets so he can retire when he wants to, but the key to his happiness throughout his life all started with some unconventional advice.


So, when I say that traditional Financial Planning is failing Canadians, where it is really falling behind is recognizing that clients are people and not numbers on a spreadsheet. “Smart Money” financial planning needs to consider the human element and not just what the CFP textbook told us to do. For individual investors, you need to ask yourself if your plan is considering your human side and are there still nagging things in your financial situation that are preventing you from being happy? For advisors you need to remember that every time you are looking at your computer screen, remember the faces that are behind the names and numbers. As Brandt often reminds me “we are all just people at the end of the day”, but that is exactly what our financial plans need to remember as well.


- Grant White, CIM, CFP®


Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.


This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.

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