BACK TO THE BOUTIQUE INVESTOR BLOG

Going Deeper with Goals-Based Investing

Kevin T. Cooper, CFA®

Vice President | Head of Investment Research


Goals-based investing involves financial planning aimed at meeting a client’s personal long- and short-term goals. By shifting the focus away from arbitrary performance measures toward client goals, Advisors build a bridge from where they are today to where they want to go in life.

More than a Passing Fad

Goals-based investing involves financial planning aimed at meeting a client’s personal long- and short-term goals. At first glance, goals-based investing may sound like marketing “fluff,” but the concept of managing toward client goals found its roots in the world of institutional investing where pension fund managers have long sought to invest in assets with cash flows that match their future payout obligations. The movement to apply institutional asset/liability matching practices to individual investors was born out of the 2008 global financial crisis. After investors in traditional, performance-based strategies saw their savings plummet, demand grew for a more sustainable approach to wealth management.

In goals-based investing, the client’s goals are the liabilities. The advisor’s role becomes structuring portfolios to meet those lifetime goals. The approach represents a fundamental departure from the traditional performance-based investing, as the table below shows.

Source: Sin, Murphy and Lamas. Journal of Financial Planning, 2019.

Expanding the Relationship

While the concept behind goals-based investing was originally adapted from the somewhat austere world of institutional investing, the approach provides a far better way to deepen and strengthen the client/advisor relationship than traditional investing ever has. That’s because goals-based investing begins with an understanding of a client’s aspirations. The mere act of encouraging a client to step back from the day-to-day and get a glimpse of the greater meaning of their life can have a profound effect, bringing into focus what they hope to achieve and how they want to impact the people and causes that mean the most to them. The more an advisor draws a client out, the better understood that client will feel and the more their trust in the process will grow. 

The Challenge of Implementation

A goals-based approach invariably means some level of dividing assets into “buckets” in order to create separate goal-driven accounts. The implications in terms of added costs should be considered carefully. Keep in mind, though, that while a bucketing approach may result in some cost inefficiencies, this approach is already widely accepted in the separation of tax-advantaged, restricted (IRAs, 529s), and taxable assets. Generally, most clients are happy to trade minor additional costs for the ability to redirect their investments toward their personal goals. Your ability to construct a financial plan with this balance in place is another way to add significant value and differentiate your practice from one-size-fits-all competitors in both digital and human realms. 

Talking to Clients

Industry experts agree that clients today want advisors to provide a customized investment plan rather than simply building an investment portfolio.1 Part of the benefit of creating a customized plan is that as the relationship evolves, the client sees their advisor as increasingly on their side as they progress toward their goals. In addition, a goals-based approach can increase a client’s willingness to act on your advice by allowing them to tangibly participate in moving their dreams forward.

So when is the best time to broach the subject of goals? Consider starting the conversation:

  • When onboarding new clients
  • During annual review meetings
  • At the start of the new year
  • After significant financial milestones or life changes

 

Keep in mind that a client’s hopes may be well thought out, or not at all. To pin down what can become an amorphous topic, a recent study by the Journal of Financial Planning shows that relying on simple, open-ended questions about goals isn’t enough.Instead, the study recommends using a master list of suggested goals (see example below) as a discussion tool in order to identify the most important priorities.

Source: Sin, Murphy and Lamas. Journal of Financial Planning, 2019.

To put a client’s goals into action, wealth management expert Jean Brunel recommends five steps3:

expert Jean Brunel recommends five steps


Brunel explains that “Identifying a client’s goals is at the heart of integrated wealth planning. And it is questions about dreams and nightmares that allow advisers to more fully understand what clients hope to accomplish with their wealth.”4  By shifting the focus away from arbitrary performance measures toward client goals, you build a bridge from where they are today to where they want to go in life. That’s a tremendous opportunity to go deeper in the relationship.


1Finke, Michael. “Goals-based investing and 4 More Trends for Advisors to Watch.” ThinkAdvisor.com. February 5, 2018.
2Sin, Ray; Ryan O. Murphy; and Samantha Lamas. 2019. “Goals-Based Financial Planning: How Simple Lists Can Overcome Cognitive Blind Spots.” Journal of Financial Planning 32 (7): 34–43.
3Foster, Lauren. “A Framework for Goals-Based Wealth Management.” April 30, 2015. Primary source of quote: Brunel, Jean L.P. Goals-Based Wealth Management: An Integrated and Practical Approach to Changing the Structure of Wealth Advisory Practices. Wiley Finance. March 16, 2015.
4Ibid.    

WRITTEN BY

Kevin T. Cooper, CFA®

Vice President | Head of Investment Research

PUBLISHED: February 26, 2020

Get Our Latest Posts Delivered Right To Your Inbox.

More Like This


Diversification Benefits of 'Sailing & Rowing' Investment Strategies

 
It’s easy for advisors to become complacent about portfolio structure by focusing mainly on investments that fit well with the present environment. As the current 10-year bull market marches on, there is a natural bias toward investments that participate in the market’s gains. But the temptation to ride the current wave of growth may be leaving clients exposed to unnecessary risk.
Read Blog

Anticipating the Next Minsky Moment

 
As the 10-year bull market continues, it's time to get reacquainted with the theories of this pessimistic economist.
Read Blog
  Back To Top