If you have been reading our blog or watching the trends in the wealth management industry, you should know that goals based investing is on the rise. See Three Pillars of Goal-Based Investing or Be a Wealth Steward not a Wealth Manager. In recent weeks, I have received the same basic question asked a number of ways, “Does Goal-Based Reporting make traditional reporting irrelevant?” The simple answer is no. First, let’s review what we mean by goals based reporting and traditional reporting. The answer to the question is really dependent on:

1. What story an investment manager wants to tell?
2. What is the client trying to understand?

It is very possible that a client simply wants to know, “Am I on track meet my financial goal?” If this is the singular and most important measure they want to understand, perhaps just a goals based report is appropriate. However, simply a goals based report doesn’t provide much context to why a portfolio is out/underperforming. For example, if a manager started managing money for a client in early 2008 to meet a wealth accumulation goal in 2018, the goals based report would not be looking too rosy in 2009. Without a traditional report that showed relative performance, a client may be inclined to fire their manager! However, relative risk and market performance which is typically included in traditional reporting would help the manager communicate why the portfolio was not currently on track to meet the goal. The manager could help the client understand that it isn’t reasonable to expect steady growth each year and in actuality, markets go up and down but over the long term should receive steady growth. The manager could show they were skilled manager and were efficient in the return they achieved for the risk exposed. They could be a great manager and traditional reporting could prove this. The introduction of goals based reporting is a game changer for wealth managers trying to communicate in ways that clients understood. Using them can help set the manager apart from the rest as a good steward of their client’s wealth and a coach helping them achieve their financial goals. However, in most cases, they are most powerful when complemented by traditional reporting.

Marshall Smith( EVP, Services )

Marshall Smith CIPM, EVP of Services, has been with First Rate since 2006. You can follow Marshall on Twitter @MarshallCSmith, or connect via LinkedIn.