Do you know the rate of returns in your financial plan?

Photo: Pixabay

The use of standardized guidelines helps ensure that financial projections are grounded in objective data.

What rate of return is your advisor using when they prepare retirement plans or investment proposals for you?

If you don’t know, it’s time to start asking.

Last week, FP Canada and the Institute of Financial Planning released the 2025 Projection Assumption Guidelines, providing standardized return assumptions for financial planners in Canada. Those guidelines are designed to promote consistency and objectivity in long-term financial projections, such as retirement planning, by offering data-driven benchmarks for expected returns across various asset classes.?

2025 Projection Assumption Guidelines overview

The 2025 guidelines incorporate market-based expected returns and historical data to reflect realistic long-term (10 year) expectations. The key assumptions in the annual report are as follows:

• Inflation rate: 2.1%

• Short-term vnvestments: 2.4%

• Fixed income: 3.4%

• Canadian equities: 6.4%

• U.S. equities: 6.6%

• International developed market equities: 6.9%

• Emerging market equities: 8.0%

• Borrowing rate: 4.4%?

These figures are based on a combination of sources, including actuarial reports from the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP), historical data, and market-based indicators like the Shiller earnings yield. ?

Importance of understanding projection assumptions

For clients, it's crucial to understand the assumptions underlying their financial plans. Projections based on overly optimistic return assumptions can lead to unrealistic expectations and potential shortfalls in achieving financial goals. Conversely, conservative assumptions may necessitate higher savings rates or adjustments in retirement plans.?

Clients should proactively engage with their financial planners to discuss the assumptions used in their projections. Key questions to ask include:?

• What return assumptions are being used in my financial plan?

• How do these assumptions compare to the FP Canada guidelines?

• What is the rationale for any deviations from these standard guidelines??

If a planner uses return assumptions significantly higher than those recommended, it's essential to understand the justification. While there may be valid reasons for deviations, such as specific investment strategies or asset allocations, consistent overestimation without clear rationale could indicate a lack of objectivity or potential conflicts of interest.?

Ethical considerations and trustworthiness

The use of standardized guidelines helps ensure that financial projections are grounded in objective data, reducing the influence of personal biases or sales incentives. Clients should be wary of advisors who consistently present projections with higher-than-recommended return assumptions. Such practices may not align with ethical standards and could compromise the trustworthiness of the advice provided.?

Engaging in open discussions about projection assumptions fosters transparency and trust between clients and advisors. It empowers clients to make informed decisions and ensures that financial plans are tailored to realistic expectations.?

The 2025 Projection Assumption Guidelines serve as a valuable tool for both financial planners and clients, promoting consistency and realism in long-term financial planning.

Clients are encouraged to actively participate in discussions about the assumptions used in their financial plans, ensuring that projections are based on sound, objective data. By doing so, clients can better align their financial goals with achievable outcomes and maintain confidence in the advice they receive.?

For more detailed information, you can access the full 2025 Projection Assumption Guidelines at FP Canada 2025 Projection Assumption Guidelines.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.