Most clients view risk as losing assets, market volatility or underperforming the benchmark, but isn’t the more relevant risk whether or not they will reach their goals? Isn’t that what really counts? Perhaps their financial plans should be structured around those goals – and so should client discussions.

Effectiveness of a goals-based approach

Goals-based investing helps to define client expectations for long-term results. It doesn’t just look at the riskiness of an investment, it also looks at purpose, aligning portfolios to why a client is investing in the first place.

The goals-based approach holds promise for developing stronger connections with clients and keeping them on track to meet their goals, but it requires some fundamental steps many have yet to take.

“Getting to know clients ‘beyond the balance sheet’ is important for advisors,” says David Goodsell, Executive Director of the Durable Portfolio Research Center at Natixis Investment Managers. “Goals-based investing brings clarity to what clients want to achieve with their investments, and when.”

The Know Your Client (KYC) discussion forms the basis of goals-based strategies as the advisor develops a written financial plan. The KYC helps identify short-term and long-term goals, as well as the cost to achieve these goals. It captures the client’s key assets and liabilities, determining whether the client’s earnings and savings rates are adequate to fund their goals. The KYC is also an effective tool for goals-based conversations because it establishes the client’s risk tolerance level and time horizon to reach their particular goals.

Goals-based investing helps address unproductive investor behaviour

Clients need to understand how investments can help them reach their goals, but they also need to address motivations for investing. Investors tend to make four critical mistakes in their decision-making process that a goals-based approach can help correct:

  1. Making emotional decisions: This often manifests when market volatility is high and investors become nervous about potential losses, then sell to prevent future losses. But emotions can also come into play when markets are soaring and clients want to go all-in. Putting the focus on goals, rather than performance, can help ground clients and help them avoid emotional blind spots.
  2. Short-term outlook: It is basic human nature to dwell on short-term results, given the immediacy of the impact, but investors setting goals as the basis for evaluating investment performance in more personal terms can remind clients of their long-term objectives.
  3. Unrealistic expectations: A Natixis survey1 revealed that Canadian investors expect portfolio returns of more than 9% above inflation, while advisors say 4.8% is more realistic. Instead of holding unrealistic performance expectations, this approach helps clients consider returns in context of making progress towards their goals.
  4. Forgetting their risk tolerance: Investors generally understand that they need to accept some risk to generate higher potential returns, but during market downturns they also can’t stray from the plan they have in place to achieve their goals.

For those who choose to invest without an advisor, there’s the added risk of not having a sound financial plan that clearly outlines their goals, risk tolerance and the right mix of investments needed to help them attain their goals.

How does goals-based investing work?

A goals-based financial plan includes ongoing communication that develops clear lifestyle goals and the investing requirements to reach them, such as a target savings rate and target returns, and explicitly outlining why the plan makes sense. A goals-based plan also refines and re-evaluates risk tolerance or client goals as life circumstances change, plus it frames the performance discussion around goals and not against a benchmark, so clients learn to focus on their true objectives.

As David Goodsell asserts, “Success might really come down to asking clients one fundamental question: Do you want to anchor your portfolios to achieving returns or achieving goals?”

Clear communication is essential

Ongoing communication is key to building trust with clients. Advisors need to reinforce the purpose of client investments – what they are hoping to achieve with these assets and how they will get there. This involves adapting the discussion around expectations for market performance and how they will react to downturns, as well as their motivations to invest.

For example, “Why did my returns underperform the market this quarter?” becomes a discussion about goals and the risks clients are willing to take to achieve them. “We know you don’t want to take too much risk, so we agreed to temper how much we put in stocks by allocating more to bonds” becomes a more grounded, practical answer. It’s difficult to help investors remain focused, but that’s why they seek financial advice. Goals-based investing offers the structure to accomplish this.

Taking this approach should result in a higher level of engagement with clients, as they develop a better understanding of their own needs and expectations. In the end, the only performance that really matters is the client who gets to retire comfortably, build a legacy for the next generation, or simply achieves a sense of financial securitys.

1 Natixis Investment Managers, 2016 Global Survey of Institutional Investors. Survey included 7,100 investors from 22 countries, 300 of whom are Canadian investors.