Goals Based Advice is just the first step in Goals Based Investing.
During market downturns, investors are commonly advised to stick with their strategic asset allocation rather than crystalise their losses in the hope that the downturn will be short lived and that returns will revert to historical norms.
The purpose of any advice business is to help its clients to achieve what they want to achieve. So, why is talking about goals-based advice seen as being 'different' from what financial planners have always done?
Sequencing risk is one of the most important things to consider when constructing your investment portfolio.
In short, advisers are more likely to succeed in meeting their client’s financial needs by adopting a Goals Based Investment (GBI) approach that encompasses dynamic asset allocation, than by following the traditional risk-based strategic asset allocation methodology that has been common practice over the previous few decades.
The premise of Goals Based Investing is to focus each investment portfolio on specific individual personal and lifestyle goals. Those goals inform the right timeframe, risk and return parameters, which in turn determine the best asset allocation and investment mix. Goals can be short-term, such as taking a holiday, medium-term, such as renovating or paying school fees, and long-term, such as saving for retirement.
When we think of investment advice, the first question almost always asked is “what’s the client’s risk profile”? Like Pavlov’s Dog, it’s almost a conditioned reflex to the way the industry has operated over so many years. Of course, it’s important to understand what type of investments the client would be ‘comfortable’ with, but does it really help them achieve their goals and is it really in their best interests to invest according to a risk profile questionnaire?
New consumer-centric financial product and distribution obligations from April 2021 offer astute financial advisers an opportunity to not only meet the requirements, but to gain an edge in achieving superior client outcomes and improve their business practices.
Most strategies in the market are too ‘cookie cutter’ and are not resilient enough to survive a downturn or an end of an investment cycle. What’s more, these strategies do not seem to adequately compensate the investor for the actual risk being taken. Are we really doing our best interest duty with the investment strategies that we are dispensing?
Looking at the current state of things, we have observed three investment ‘wrongs’ many financial planners are guilty of:
Goals Based Investing (GBI) continues to gain recognition and be better understood amongst advisers. In his article Goals Based Investing: Should it be the norm? Giuseppe Ballocchi describes GBI as the way of the future for financial advice. Are we finally seeing a shift from the more traditional Strategic Asset Allocation approach to GBI? The simple answer is yes. Why, because it makes sense. Client goals should determine investment decisions. And, there is a rising school of thought that SAA investing will not suit likely market conditions going forward.
