Most of us set goals for ourselves – some short term, others based on priorities and objectives that will deliver the desired outcome five, ten or twenty years down the line. Many of those goals will require little or no financial planning, but others certainly will. Whether, the objective is to start a business, retire at a relatively young age, or take time out to study full time, it is vital to put the financial underpinning in place that will allow the goal to become a reality.
But here’s the potential problem. Traditionally, investment advisers have not necessarily ignored the life objectives of their clients, but nor have they framed their advice or recommendations around products and strategies that are tailored to delivering very specific outcomes.
It is, perhaps, over simplifying matters to say that a traditionally-minded adviser will tend to home in on their client’s appetite for risk, mapped onto a preference for growth, income or a combination of the two, but that is often the template that defines the process.
From there, the adviser may go on to talk about maximising the portfolio return or beating the market. Financial strategies aimed at attaining particular goals tend not to be discussed.
The goal-based investment represents a significant break from that tradition.
What is a Goal-Based Investment?
Goal-based investment switches the perspective by putting life goals at the centre of any conversation that takes place between adviser and client.
And that can represent a radical shift in investment strategy. For instance, when an adviser takes a goal-based approach to the requirements of a client, the focus is no longer on the traditional measures of success, such as whether or not a particular fund is outperforming competitors.
Instead, the adviser will focus on whether a particular investment strategy is on track to enable the individual to successfully attain key life objectives.
This is an important change, not least because it effectively puts the investor in the driving seat. If done properly it ensures that the investment products in a portfolio are all absolutely relevant to the needs of the investor.
So what does this mean in practice? In reality, many of the broad goals that we set ourselves are fairly universal. They probably include planning for retirement – while mitigating longevity risks – buying a home, having enough money to put one or more children through college.
But no two sets of circumstances are the same. The life changes we all go through happen at different times for different people and individuals also assign to them different priorities.
So from the perspective of a wealth manager, a goal-based approach requires a deep and thorough understanding of the investor, in terms of his or her ambitions and objectives. Some of these goals will be necessities – for instance, a sufficient retirement income to support a required quality of life while also meeting any ongoing financial commitments. Other goals may be ‘nice to’ haves rather than ‘must’ haves, but they will all be considered.
A wealth manager will also look at the investor’s assets – which will typically include existing investments, property, income and cash. This will be set against liabilities, including any debts. This holistic approach enables the wealth manager to formulate a strategy that addresses the client’s goals while taking into account the resources that can be brought into play.
The outcome is likely to be a multi-layered investment strategy, with a range of products being deployed to address different needs across short, medium and longer-term timelines. This could include a low-risk savings account (to provide short term security), a separate fund that will be used to save for school fees and perhaps higher/risk, higher return investments aimed at enabling an investor to attain financial independence well before the retirement age.
In addition, there will probably be pension provisions. However, it’s important to stress that the components of the financial plan can be changed as circumstances and priorities evolve.
That means that in addition to a focus on the goals, wealth managers and advisers should continue to regularly review the strategy as the investor’s life changes.
That’s certainly the approach taken by The Route – City wealth club. All of The Route’s Members are treated as individuals and their life goals define the advice offered and the products recommended. Crucially, The Route also reviews the changing circumstances of each Member on a regular basis.
Goal-based investing offers investors an opportunity to tailor investment directly to their own requirements, but there is at least one other potential benefit.
These are turbulent times on the financial markets. Sudden falls in shares or property values can trigger precipitous action by individual investors and their advisers in reaction to market moves. Goal-based investment tends to discourage reactive move. At its heart is a commitment to measuring the performance of specific products to ensure they are tracking well against stated objectives. This, in turn, tends to foster a more measured approach to investment.
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