Growing Your Financial Advisory Practice
010: How to determine key assumptions when developing financial projections
May 30, 2018
John De Goey is a portfolio manager at Industrial Alliance Securities. He’s also an author and a recognized Canadian authority on the subject of professional, transparent, and evidence-based financial advice. John has received numerous awards for his contributions to the financial planning field, including the Donald J. Johnston Lifetime Achievement Award. He’s also been named one of the top 50 advisors in Canada by Wealth Professional magazine.
In today’s episode, John will be talking about the assumptions advisors need to make when developing financial projections. Tune in to the episode to hear what John has to say about the key assumptions an advisor needs to make before developing any financial projections and advisors’ biggest mistakes when making assumptions. John will also share some information about his upcoming book.
Topics Discussed in this Episode:
- The key assumptions an advisor has to determine before developing any financial projections for their clients
- How to come up with reasonable assumptions about the rate of return
- The biggest mistakes that advisors make about assumptions
- How advisors can keep clients accountable
- How different expenses can change as clients age
- How taxes can affect the rate of return
- The difference between nominal rates of return and real rates of return
- The rates of return for income
- How it’s possible for the real rate of return on income to be negative
- How to approach adjusting long-term projections for different types of clients
- How to adjust long-term projections to meet the needs of clients with short-term needs
- John’s new book about the financial advisory industry, coming out in late 2018
Quotes From John:
“The thing that I think is most important, and this is where the rubber hits the road, is the rate of return that you should be expecting when you actually do these projections.”
“I don’t think it serves anyone’s purpose to be unrealistically optimistic.”
“The mistake that advisors make is that they enable clients to do whatever the client thinks is easy, without giving them the reality check of doing what is necessary. “
We’re sure you don’t want to miss a minute of what John has to say, so make sure you listen to the full episode above. Below, we want to focus on three big mistakes to avoid when making assumptions:
- Not encouraging clients to defer CPP
- Enabling clients’ poor behaviour
- Not accounting for costs when assuming the rate of return
For more on what key assumptions you need to consider, how lifestyle expenses vary by age, and why John’s calling BS on the financial planning industry, listen to the full episode through the link above or find it on iTunes or Stitcher.
Mistake #1: Not deferring CPP
While John emphasizes the uniqueness of each client’s needs, there is one piece of advice he thinks every Canadian should consider: deferring CPP until age 70.
First, let’s consider some of the reasons the vast majority of people don’t defer their CPP. It might mean having to:
- Work longer
- Dip into savings
- Convert their RRSP to an RRIF earlier
- Finding or creating a supplemental source of income
These options can certainly seem daunting, but consider the payout. For every month that an individual defers his CPP, he gains an extra 0.7%. Over a year, that’s 8.4%, and waiting until 70 means gaining a 42% increase on his CPP payout. Where else can you get that kind of return, risk-free?
This option needs to be on the table for every client you work with.
Mistake #2: Enabling poor behaviour
One major advantage of working with a human financial advisor over working with a robo-advisor is the focus and discipline she can provide for clients. As an advisor, you’re supposed to keep your clients accountable and ensure they stay on track to achieve their dreams.
But are you really doing that?
Saving is the factor individuals have the most control over when it comes to their finances, and that’s where advisors really need to be stepping up to help clients pick a realistic savings rate. However, John sees a lot of advisors dropping the ball on this crucial point.
As he puts it, “The mistake that advisors make is that they enable clients to do whatever the client thinks is easy, without giving them the reality check of doing what is necessary.” A comfortable savings rate may not actually allow clients to accomplish their goals.
It’s not an easy conversation to have, but John says it’s essential to be realistic with clients and use projections to actually help them see the effect of their current savings rate. Give them the truth about where they’ll end up based on their current behaviour, and don’t let them off the hook just because it’s easy. Then, help them explore how they can cut down on costs, invest more aggressively, and save up the money they will need in the future.
Hint: One area in which you can start holding your clients’ toes to the fire? Begin by making sure they’re not letting TFSA or RRSP contribution room go unused. Then, get them focused on shrinking any gap they have as much as possible.
Mistake #3: Not considering costs
This is the big one. The major no-no. The eighth deadly sin.
Remember when we said we were coming back to rate of return?
According to John, the biggest mistake financial advisors make in projections is not incorporating cost into the rate of return.
Most advisors will tell clients the nominal rate of return of an asset class, but that leaves out the cost of the product, management, and advice; it also fails to account for inflation.
Sure, it can be tempting to tell a client that you can get them 7 or 8%, especially if everyone else is doing it. You want prospects and clients to feel optimistic about their future (and about how you will help them get there!). You definitely don’t want to be promising less than the other guy.
But as John puts it, “What you call less optimistic I call more realistic.” While it might make clients happy at first, consider where faulty assumptions can get them in the future. A false sense of confidence now can lead to huge problems for clients down the road.
In fact, John expects that a crisis may occur in Canada, and even around the world, precisely because advisors and planners haven’t been accounting for costs and inflation when creating projections for their clients.
Hint: Be open with prospects and clients about why your calculated rate of return may be lower than someone else’s ‒ they’ll be grateful for the education and see you as more trustworthy and reputable.
That’s all for this time! Check out the full episode to catch all of John’s experience and advice. Don’t forget to sign up below to get new episode notifications straight to your inbox, and subscribe to the podcast on iTunes or Stitcher.<<< Back to Growing Your Financial Advisory Practice