Financial Planning: A Goals-Based Perspective
In short form, the idea behind goals-based financial planning is short and sweet—the process of identifying and quantifying your client’s financial planning goals (emergency fund, retirement, children’s education, etc.), and then designing an investment plan that has been worked to optimize achieving each of their goals.
Ideally, this plan would then provide a level of confidence and a probability of success for each goal that the client has to assist guiding savings and investment objectives.
So how will goals-based planning differ from the traditional financial planning?
In more traditional scenarios, the financial advisor looks at a client’s investable assets in their entirety. This allows them to determine and quantify their client’s objectives and goals with their portfolio—much like goals-based planning, but the strategy development is significantly different.
In a best case scenario, the financial goals of your client—along with their age, retirement age, and life expectancy are plugged into the financial planning software and will give you the number that your client needs to retire. At that point, the software can analyze and provide you with the information you need to meet your client’s future liabilities—allowing you to match it with a portfolio that aligns with the client’s abilities and within a comfortable risk level.
Your client’s ability and comfort level with risk-taking can be determined by providing them with a short risk questionnaire.
Goals-based financial planning takes this a step further by looking at the client’s goals independently and prioritizing them (i.e. “Have to Have” vs. “Want to Have”). When a financial planner does this, they can separate the goals that require a more conservative asset allocation and those that can take on more risky behavior.
Consider the following example—a client might not want to compromise on paying for their kids’ college or retiring with a healthy nest egg, but they may be willing to take on higher risk investments to achieve less important goals like being able to travel every year. This allows the financial advisor to have the opportunity to take a segmented look at the client’s assets and then they can assign a confidence level or probability of success for each goal.
When is goals-based financial planning a better strategy for clients?
Goals-based financial planning can be superior for the majority of clients because it has a basis in behavioral finance. When the probability of each goal is clearly defined, there is less emphasis on the short-term market fluctuations—providing a long-term view of the client’s portfolio.
When you manage client’s behavior with the goals-based framework, it becomes easier because it gives the client confidence in the link between their investment strategy and the client achieving personal finance goals, providing a more focused financial management strategy.
This is especially effective with clients that have any uncertainty in achieving their personal financial management goals. This could mean clients below $5 to $10 million in investable assets—depending on their lifestyle needs. Traditional financial management/advisory models place the most profitable clients as those who have most of their assets under the firm’s management—and they get the most attention. However, if clients are so well-off that there is no question in meeting essential financial goals, a holistic portfolio approach to risk could be the best solution.
Goals-based Financial Planning Changes the Game.
The majority of financial advisor-client relationships exist in this state of playing a game of who can pick the best stocks or funds that beat the market average. However, the responsible investment advisors are more concerned with adding value by managing client behavior and expectations. When push comes to shove, clients want answers when they are paying for active management and they earn less than just buying into a broad market ETF. Explaining the value to clients can become difficult since most reporting standards and mutual fund updates stick to emphasizing performance about market benchmarks.
Goals-based financial planning allows advisors and clients alike to reframe the mentality behind investing. You are no longer solely running to beat the market or manage risk based solely on the historical volatility—the advisor and client alike can focus solely on risk and how it relates to a client not achieving their goals. The market and the investment products used in the market become the means to the end—the vehicle to the client’s goals, instead of simply the result itself. As the financial management industry further adopts the technology, better strategies can be offered to help a wider range of clients—helping firms maintain their profit margin and provide a better client experience.