Three Pillars of Goal Based Investing

Published by Marshall Smith, CIPM, Managing Director - General Manager, Products
December 8th, 2014
goalbasedinvestmentprocessGoal Based Investing is quickly becoming a buzz word in the wealth management space.  Trevor Hunnicutt from InvestmentNews recently published an article “Merrill Lynch ‘goals-based’ accounts to reach $200 billion milestone”, Trevor points out in the article that the goal based framework is a key to asset acquisition, noting that one in four new dollars under management are being added from existing clients. According to a recent report from the Aite Group “Wealth management firms that will lead in this new fiduciary era are those that will make the fee-based account the central investment offer, and those able to give clients continual insight into how well they are achieving their goals.”  By positioning yourself as a trusted advisor of your client and the steward of their financial goals, clients are more likely to give you more assets to manage as they believe you have the right motivations and insight to deliver what they are looking for.  While many investment managers continue to focus on their ability to deliver “alpha,” some amount of return in excess of their market benchmark, those that are serving the private wealth space are finding more success in positioning their real value added as guiding a portfolio to meet their client’s goals.  This could be making a charitable donation, generating enough income to live on or to fund their children’s Ivy League tuition (ouch!). A goal based investment process can be thought of in three basic steps:
  1. Create the Plan – Here financial planning takes place and the advisor must understand what the client goals are and what their relative priorities are.
  2. Execute the Plan – Here we take on more traditional investment practices and align the clients goals to the best portfolio that takes on a risk/reward profile that provides the highest likelihood of achieving the clients goals.  Think capital preservation, income generation, or aggressive growth investment objectives.
  3. Report Against the Plan – The last step is then meeting with the client and showing how the investments have performed against the goal.  Are we ahead, behind or on track with meeting the goals? Showing this to the client then leads to taking action such as contributing more to the portfolio, increasing risk , decreasing risk or re-assessing the goals altogether.
The wealth management space becomes more competitive each day whether by the interruption of so called “robo-advisors,” the rise of passively managed ETFs and Mutual Funds and not to mention the self-serve tools provided by discount brokerages that make the individual investor feel like it’s so easy a baby could do it.  Wealth managers must continue to position themselves as trusted advisors, understanding how to deliver value through meeting their clients goals and setting their minds at ease because their wealth is being stewarded. For more information on Goal-Based Reporting and how it compares to time-weighted and money-weighted reporting, download our newest White Paper – Making Investment More Meaningful: How Goal-based Reporting Transforms Investor Experience.
About the Author: Marshall Smith CIPM, Managing Director of Service Bureau, has been with First Rate since 2006. In this role he oversees Service Bureau, the business line responsible for clients that outsource their performance processing function, develops and maintains client relationships, and develops strategic planning for all Service Bureau operations. In addition, he leads First Rate’s Marketing team. You can follow Marshall on Twitter @1stRateMarshall, or connect via LinkedIn.

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