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Goals-based Investing is increasingly popular in the financial industry. Aligning investment strategies with life goals has created a unique blend for investors and servicers. The differentiation from traditional investing measures provides benefits to the investor and service provider alike.
Goals-Based Investing has grown in popularity since the Great Recession of 2008-2009, fueled by investors’ desires to minimize risk through portfolio diversification, as well as anchor investment decisions around an attainable life goal. This new investment model primarily measures an investor’s performance based on their progress towards specific long-term goals, whereas traditional investing measures performance based on annual percentage returns.
Goals-Based Investing offers a comprehensive solution to clients focused on needs and goals that matter to them rather than benchmarks and markets. Developing a Goals-Based Investing platform requires careful consideration, planning, and coordination however, the advantages to both the client and the advisor have made it a worthwhile investment in the eyes of many firms and is trending towards becoming a “table stakes” offering. Below is a summary of the high-level benefits of Goals-Based Investing:
Traditional investing focuses on either an individual account or the overall portfolio, whereas Goals-Based Investing recognizes that individuals have different goals, each of which may have a unique time horizon and risk profile. This requires tailored savings and investing solutions. Accordingly, sub-portfolios are created for each goal to ensure that they are managed to enhance an individual’s likelihood of achieving those goals.
Goals-Based investments are managed to an acceptable success probability target, which allows the Investment manager to drop standard benchmarks and instead set tailored benchmarks that consider their investors’ risks and needs.
Goals-Based Investing prioritizes the achievement of short-term goals. By continuously setting and meeting short-term goals that align with long-term goals there are two distinct benefits. It helps identify funding shortfalls that can be actioned earlier rather than later and it creates persistent focus on the long-term goal by setting necessary short-term goals to achieve them.
A Goals-Based Investing strategy goes beyond the traditional investing approach, offering a variety of benefits to clients, advisors, and institutions.
Consumers are looking for portfolios that are tailored to what they want to achieve. Consumers are looking for their financial goals to be achieved and that the investment portfolio that is being built is aligning directly to their goals and not others. This approach personalizes the interaction between advisor and investor, creating a working relationship that is built upon trust.
The right strategy is employed for the consumer, keeping the client within their risk tolerance threshold so they can comfortably achieve their goals. This strategy prevents advisors from investing based on returns, instead focusing on investments within an acceptable level of risk to ensure that the goals are met.
Advisors are creating or leveraging portfolios, tailored to minimize risks while achieving their client’s goals. Being that the investment plan is tailored to minimize risk there is less impact when markets are in flux. Therefore, advisors are more likely to select an investment strategy that is resilient to market volatility in proportion to the risk tailored to the goal.
Reputational capital is often an important factor to investing consumers. Creating a brand where the advisor is catering to the exact needs of the customer can be a meaningful way of building the client relationship and the reputation of helping clients achieve their life goals.
In a market with an increase in automated investing, interactions with financial advisors provide a more personalized experience when handling Investment strategies. Live conversations with an advisor is often valued by the client; through Goals-Based discussions, the financial advisor may obtain insight into their client’s overall financial picture which could potentially create opportunities for managing a larger share of the client’s assets.
Investors are better aligned to a portfolio with a risk profile suited to their goals. There is more security in not being invested in a portfolio that is designed to maximize returns beyond those required to meet the specific goal within the specific time horizon. Knowing that there is constant monitoring on their portfolio, which is aligned to specific goals, and having the ability to pivot as needed creates an additional layer of security for investors.
Being that advisors know their investor’s individual goals, this allows them to create a customized portfolio and the ability to open specific financial accounts that tie to specific goals.
An investment model based on an investor’s goals may increase the client’s commitment to their life goals because they are participating in the investment process. Advisors and clients can reduce impulsive decision-making and overreaction to market fluctuation by allocating assets with varying levels of risk to specific goals that differ in duration and importance to the client.
As a result of the Goals-Based Investing strategy, advisors can increase client engagement by establishing measures of success for their clients. Investors further limit irrational investment decisions by measuring success based on a range of goals rather than traditional benchmarks alone.
A Goals-Based Investing approach provides transparency to investors of any downside risk which allows for a more informed investor. Clients are aware of their investments’ potential worst-case scenarios and understand how it fits into their risk threshold.
The growth of Goal-Based Investing has resulted in a demand for infrastructure integration that facilitates the repurposing and merging of existing financial platforms to meet the demand for Goal-Based investing strategies. Sia Partners has identified infrastructure functionalities that are critical for successful platform integrations. The five considerations below are key focus areas covered in our assessment to develop integration plans:
Evaluate response time (SLA) for Monte Carlo analysis and Probability of Success run time (number of asset classes in portfolios, account type groups, annuity types, and iterations), inclusive of calculating projections and returning responses through Firewalls
Assess capability to support expected traffic volumes (e.g. number of financial plans run daily, monthly, etc.)
Assess disaster recovery plan, including details on the action plan and timing for situations in which servers stop working
Evaluate current cloud readiness and/or strategy of implementation and upgrades
Assess User Interface, tool intuitiveness, and other functionality related to a friendly User Experience
Sia Partners works with clients to develop successful Goals-Based Investing platforms by strategically planning, coordinating with stakeholders, and analyzing key features and considerations such as goal setting, asset allocation strategies, performance monitoring, and reporting. Sia Partners assists Financial Services clients in assessing their in-house tools and third-party platforms, as well as advising on “build” versus “buy” decisions, platform selection, minimal viable product (MVP) analysis, target operating model decisions, and road map development. Our analysis encompasses a review of infrastructure factors including performance, scalability, fault tolerance & disaster recovery, cloud readiness, and user experience, which are critical to successful platform integration, implementation, and usability.
We perform an analysis of vendor offerings to assist our clients in determining whether a vendor should be utilized to support back-end analytics for the firm’s Goals-Based Investing tool. Conjunctionally, we assess API components to document gaps between the vendor’s offerings and the client’s Financial Planning tool. Sia Partners continues to add value to the development, implementation, integration, and launch of a client’s Goals-Based Investing platform by establishing a PMO Office to structure program level activities, manage program governance, and coordinate with cross-platform teams to completely integrate the Goals-Based tool.
Our extensive experience does not only extend to Goals-Based Investing but we are experts in the Wealth and Asset Management space and have assisted clients in the five pillars below: