Financial Planning and Risk Management — Jason’s Corner

Financial Planning and Risk Management — thinking past the the three predictable risks:

Like many of my students, I started my career in the insurance side of the financial advisory business. I cut my teeth teaching the LLQP and then life insurance Continuing Education courses. Probably also like many students, I ended up in our financial planning programs mostly by accident, without much consideration about what financial planning really was. I hadn’t dug deeper into financial planning and risk management.

For a long time, I thought about risk management primarily through a life insurance lens. The same three predictable risks that insurance agents have dealt with for roughly a century dominated my thinking about risk management. (Those risks I’m referring to are dying too soon, outliving one’s money, or getting seriously ill or hurt along the way.)

This is not a comprehensive risk management picture, though. Financial planning, in my opinion, is about creating three outcomes:

• Optionality: The client should be able to adjust to all the changes life throws at them.
• Avoiding big mistakes: The client should feel like they have the time and resources to make big decisions. They should be comfortable seeking advice at the right times.
• Allocating resources in a manner consistent with values: The client should be spending and saving in a way that improves their relationship with money.

The first two of these (and possibly the third) require that we take a broader view of risk management than the traditional one described above.

Which of the following risks do you consider in the financial plans you develop for your clients?

• Short-term disability
• Long-term disability
• Illness of a family member (parent, spouse, or child)
• Damage to the car
• Total loss house fire
• Flood or other water damage
• Illness or accident while travelling
• Loss of capacity (of the client, spouse, parents, or children)
• Job loss (employer goes bankrupt, termination, industry changes)
• Client gets sued (in a professional capacity, or due to personal liability)
• Greater inflation than expected
• Currency fluctuations (especially for those with lots of travel or out-of-Canada retirement plans)
• Changing interest rates
• Market corrections

Why do you or don’t you talk about each of these? What tools do you have or could you develop to have more comprehensive conversations about risk?

As I write this, I am personally dealing with at least 3 items on this list. If we didn’t have good emergency funds, contingency plans, powers of attorney, insurance (life, living benefits, and property & casualty), spending habits, asset allocation, and, most importantly, good communication between my spouse and I, we would be struggling to manage.

As a quick example, I know that variable rate mortgages generally outperform fixed rate mortgages. However, when we last renewed our mortgage, I chose a fixed rate. Today, with rates going up, I don’t have to commit any mental energy to what is happening with our mortgage. I am free to expend my cognitive capacity on more pressing concerns.

That’s just a brief primer on why I would encourage you to find ways to have robust risk management conversations with your clients, going beyond the three predictable risks.

— Jason Watt, CD, CLU

Last month we discussed risk management as a student and how proper planning and risk mitigation can help give you the ease of mind to focus on your studies and succeed. You can read that article here.