Orchestrating Advice Through Goals-Based Wealth Management

Published by Craig Iskowitz, CEO and Founder of Ezra Group, LLC
May 18th, 2015
“The conductor must manage the collective conscience of a hundred musicians to breathe life into the score.”  – Charles Munch, symphonic conductor, violinist and former music director of the Boston Symphony Orchestra

“The conductor must manage the collective conscience of a hundred musicians to breathe life into the score.”
– Charles Munch, symphonic conductor, violinist and former music director of the Boston Symphony Orchestra

There was a time when a financial advisor’s job was one-dimensional and focused solely on managing clients’ assets. Now, an advisor has become more like an orchestra conductor. He/She must coordinate multiple aspects of a client’s financial life so that they all work together in concert.

This new role cannot be accomplished using old thinking, however. Advisors need an updated methodology for delivering advice that offers a holistic viewpoint, provides better client outcomes and can satisfy regulators.

Goals-Based Wealth Management

A trend that has been gathering momentum across the industry and could help advisors is goals-based wealth management (GBWM). A recent white paper from the Money Management Institute (MMI) defines GBWM as “the comprehensive management of investor assets – from accumulation through withdrawal and bequest – to help investors achieve optimal outcomes across the multiple accounts and products typically found in a client household. “ The main components of GBWM are:

  • Goals-based planning;
  • Product and investment selection;
  • Asset allocation; and
  • Multiple-account optimization.

The process begins with the identification and prioritization of investor goals. This is often handled in financial planning software, but can also be done manually. The key is to capture the client’s goals so that the rest of the process can be modified to support them.

When all aspects of the GBWM methodology are coordinated in a tax-efficient manner, including planning, allocation, location, and monitoring, the results can be an almost 200 bps in incremental returns, according to research done by Morningstar.

“The key infrastructure elements of goals-based wealth management exist,” noted Jack Sharry, Chairman of MMI’s GBWM Committee and Executive Vice President of Strategic Development at LifeYield, LLC. “The challenge to the industry is making it all work together in a seamless end-to-end process.”

Coordinating Across Multiple Accounts

Sharry, who recently spoke at the MMI 2015 Annual Convention, reported that the average investor has 5.6 accounts per household. This means that advisors usually have to manage multiple accounts with different tax registrations in a coordinated way to reap the benefits of GBWM.

Sophisticated software is available from advisory platform vendors that can optimize the management of multiple accounts in a household. This optimization includes asset location, rebalancing, protection strategies, income sourcing and withdrawal sequencing, Sharry stated.

Help for Compliance

Automation through technology provides additional benefits around compliance. The current regulatory environment requires that advisors take a holistic view of their clients’ financial picture.

Some firms have been visited by regulators who are investigating ‘reverse-churning’, Sharry warned. This situation occurs when accounts are converted from commission-based to fee-based, but cannot justify the annual fee since they have been infrequently traded, he explained.

GBWM provides a clearly-defined methodology that aligns financial advice with client goals. The process improves investor outcomes and justifies advisor fees, even with formerly commissioned accounts that were not traded very often in the past.

The MMI white paper, entitled Improving Investor Outcomes Through Goals-Based Wealth Management, states that the source of much of the improved returns come from reducing the client’s overall tax footprint.

Ernst & Young provided a study, titled Improving After-Tax Returns, Retirement Income and Bequests Through Tax-Smart Household Management, which suggests an improvement in GBWM outcomes reaching as high as 33% over an investor’s lifetime.

Risk Management

Risk management of GBWM can be divided into two components; risk capacity and risk tolerance. The difference between the two must be clearly defined as part of the overall program. These terms are sometimes confused and can result in clients getting assigned to the wrong asset allocation model.

Simply stated, “risk capacity is how much can you afford to lose, while risk tolerance is how much you are willing to lose”, according to John Ndege, Founder & CEO of Pocket Risk, a cloud-based application for measuring client’s risk profile.

Properly defining a client’s risk capacity avoids taking on potentially unnecessary risk and should be viewed at the household level. Risk tolerance is a subset of risk capacity and should be evaluated on a per-goal basis.

Three Keys to Improving Investor Outcomes

There are three keys to improving investor outcomes using GBWM:

  • Cost reduction – the use of passive investments, such as Vanguard ETFs or mutual funds;
  • Improving risk-adjusted returns – through the use of properly aligned models linked to automated rebalancing avoids the common pitfalls of mismatched risk tolerance and buy high/sell low;
  • Tax reduction – optimization that minimizes taxes can deliver more benefit than the other two combined.

GBWM is not a fad that will disappear like the latest pop music. It is a comprehensive process for delivering advice that provides a win-win result. Clients receive holistic advice that is better suited to their future goals. Advisors receive more loyal clients, a scalable process that increases the number of clients they can support and defense against negative regulatory impact.

Like Classical music, GBWM will be reinterpreted by advisors looking to add their own flair or to make a better fit their client base. It will continue to mold the industry for many years and allow advisors to think more like great conductors, breathing life into their financial advice.

About the Author: Craig Iskowitz is CEO and founder of Ezra Group, LLC, located in East Brunswick, NJ. Ezra Group is a management consulting firm providing advice to the financial services industry on business and technology strategy, software development, and marketing. Craig has over 20 years of experience in wealth management, retail and institutional brokerage, market data and front and middle office operations. He previously worked for ADP Brokerage Services (now Broadridge Financial) for almost 10 years before becoming a consultant. His clients include many Fortune 500 firms such as The Bank of New York, Fiserv, Standard & Poor’s, and J.P. Morgan Chase. Craig is also the editor and publisher of the Wealth Management Today blog (www.wmtoday.com), which focuses on news and information for the wealth management industry with focus on fee-based advisory platforms. Craig is also available to speak on wealth management trends, participate in industry panels, or present one of his industry classes such as, Managed Accounts 101. Craig can be reached at craig@ezragroupllc.com

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