Standards-setting bodies remind planners to emphasize 'long-term nature' of projections amid inflation
FP Canada and the Institut québécois de planification financière (IQPF) have unveiled the 2022 Projection Assumption Guidelines and Addendum for professional financial planners across Canada.
The new guidelines, which are intended to assist financial planners in developing unbiased, long-term financial projections of 10 years or more, are effective starting April 30, 2022.
"Some clients may be feeling uncertain or anxious amidst market volatility and rising inflation,” said Lesley Poole, CFP, Chair of the FP Canada Standard Council Standards Panel. “The Projection Assumption Guidelines are a useful tool for financial planners when preparing financial plans and projections for their clients to assist clients in realizing their long-term goals with confidence,"
The Standards Panel is made up of CFP experts, a Québec-licensed financial planner, and a member of the public. The panel oversees the Projection Assumptions Guidelines Committee, which produces and maintains the guidelines.
In announcing the new guidelines, FP Canada reminded financial planners to “always use professional judgment, document their assumptions, and communicate with clients clearly.” It’s also important to emphasize the “long-term nature” of the estimates used in the guidelines amid turbulent markets. It added.
Global economies are currently suffering a significant spike in inflation, caused in part by COVID-related supply concerns and recent geopolitical tensions resulting from Russia's invasion of Ukraine. Against that backdrop, countries across the world are experiencing multi-decade highs in inflation; recently, inflation in Canada reached 6.7% in March, the highest it’s been in 30 years.
In some shorter-term time frames, inflation can display more pronounced swings. When looking at inflation rates over a longer period, however, elevated levels don’t persist.
The CPI had averaged 2.32 percent in the previous five years and 1.82 percent in the previous ten years as of December 2021. Over a ten-year period, the current fast-growing inflation is unlikely to continue.
“It should also be noted that increasing just one data point (like inflation) when preparing client projections would ignore the corresponding shifts in interest rates, fixed income, and equity-based assets and their resulting impact on the projections,” FP Canada added.
Tempting as it may be, drastically altering one assumption in the current situation is not advisable given the interrelation of classes, it said.
The Committee advises financial advisors to present clients with alternative scenarios and estimates rather than changing one assumption. Where necessary, financial planners may deviate from the rate of return estimates by up to 0.5% and still be compliant with the guidelines. Any deviation of more than 0.5% in any direction should be justified and supported by documentation.
Assumptions should be documented with strong reasoning, clearly stated to clients, and backed up by written documentation.
"The Guidelines, which are based on reliable and unbiased data, support professional financial planners in offering sound advice and ensuring that the plans their clients put into practice serve them well in the long term," said Martin Dupras, a.s.a., F.Pl., M.Fisc., ASC, and Chair of the Projection Assumptions Guidelines Committee.
