What is goals based investing?
Quite simply – goals based investing is setting personal and lifestyle goals and using the financial advice process to produce these outcomes. Taking it a step further fund managers are now developing products that can offer one stop solutions for goals based investing.
The most common ‘goals’ that investment strategies/products need to meet include income, holidays or leaving an inheritance for family.
The key differences of goals based investing vs a retirement only objective are:
- For advisers, the client is much more involved in the setting of the strategy and the focus is on needs not risk tolerance
- For the fund manager success is not about meeting benchmarks or beating competitors but instead meeting the client’s ‘goal’ – quite a different mindset to how fund managers are currently measured and compared
Is it just a fad?
Goals-based investing has been on the agenda for years but now firms are actually stepping up to offer strategies and products to address the demand. A report from David Blanchett from Morningstar says that ‘….goals-based solutions have nearly doubled since 2012[1]. What was once a passing trend has quickly become the status quo in the US.” And in Australia there are fund managers that are developing and offering products to meet this demand such as AMP and UBS and on the advice side, financial planning company Ignition Wealth has become the first Australian ‘robo-adviser’ to offer goals-based investing. Ignition Wealth has appointed SiResearch to provide adaptive asset allocation built around goals which have a specific objective and timeframe. The goals-based model acknowledges that investors’ goals may fall into several buckets including short term, medium term and legacy.
Benefits of goals based investing
- Goals make it far more likely you’ll save for each goal in advance—which makes you more likely to achieve them
- Goal-based investing ideally matches your time horizon to your asset allocation, which means you take on the optimum amount of risk and not more
- Goals based investing nicely takes into account behavioural finance and Modern Portfolio Theory to optimise outcomes for ‘retail’ investors. Modern Portfolio Theory does not accommodate for illiquid assets which can be used as key investments for goal based investing. Goals-based investing tries to marry Modern portfolio theory—the foundation of most asset-allocation strategies, first introduced by Nobel Prize laureate and economist Harry Markowitz—with investor behaviour ie. behavioural finance. For more on this a great research paper that we recommend reading is Beyond Markovitz by Ashvin B. Chhabra. https://www.regions.com/virtualdocuments/beyondmarkowitz_wealthmanagement.pdf
Goal based investing – what does it mean for fund managers?
The good news is for fund managers is that they can utilise where possible their existing product range to offer goals based investing solutions. This will be more applicable to larger fund managers where a range of funds across different asset classes is offered. An example is AMP Capital where outlined below is how they match investors ‘goals’ with their product range.
Goal 1 – Essential needs
- Drawdown solution – cash management fund
- Essential needs – corporate bond fund, equity income fund
Goal 2 – Lifestyle wants
- Multi asset fund – used to grow wealth and protect on the downside
Goal 3 – Legacy aspirations
- High growth fund which allows compounding of wealth over time
Where to from here…..
There are many criticisms of goals based investing – the key one being from the advice community that isn’t goals based investing what they do every day and goals-based advice should be considered the foundation for every financial planning business? In other words, it is not a new concept, fad or anything else.
For fund managers:
- Be aware of the rise of goal based investing and have these conversations with your investors and clients
- Review your product range and work out what could be suitable for goals based investing – each goal because it has a unique time horizon, has its own asset allocation and its own risk profile. You may have something to offer here.
- Be aware that there are lots of ways to define goals-based investing and many ways to implement it – you may just have a solution
[1] http://images.mscomm.morningstar.com/Web/MorningstarInc/%7B66f57d08-9e45-45e7-b8d1-56b21f9185f8%7D_Morningstar_-_Blanchett-_Seven_Steps_to_Goals-Based_Finanical_Planning.pdf
