Understanding Financial Planning Guidelines and Their Impact on Investment Returns

The financial planning landscape in Canada has recently seen some significant changes with the release of updated guidelines by the main financial planning associations. These guidelines, which went into effect on May 1, aim to provide a framework for financial planners to use when creating long-term financial plans for their clients.

One of the key issues addressed by these guidelines is the need for realistic assumptions when projecting returns on investments. Many people, including some financial planners, tend to overestimate the potential returns on their portfolios, leading to unrealistic expectations. The guidelines suggest that a balanced portfolio should aim for returns between six to seven percent in equities and three to four percent in bonds.

However, the guidelines also emphasize the importance of factoring in advisory costs and product charges when projecting returns. This is where many people, and even some planners, fall short. By not accounting for these costs, the projected returns may be significantly higher than what is actually achievable after fees.

In fact, the guidelines suggest that after deducting advisory costs ranging from 1.25% to 2.25% annually, the actual net return on a portfolio may be much lower than initially projected. This discrepancy raises questions about the value of using a financial planner or advisor, especially if the net benefit is minimal compared to investing in a low-risk vehicle like a Guaranteed Investment Certificate (GIC).

The challenge for the financial services industry lies in addressing these issues and having open conversations about the true value of financial planning services. As the guidelines highlight, it is essential for planners to provide realistic projections and consider all costs involved to ensure clients make informed financial decisions.

Overall, the release of these updated guidelines sheds light on the need for transparency and accountability in the financial planning industry, urging both planners and clients to reevaluate their approach to investing and financial planning.