Is goal-based investing really anything new?

Is goal-based investing really anything new?

Is goal-based investing really anything new? We caught up with experienced advisor Sean Harrell for this special post examining the realities of goal-based investing.

“Goal-based investing seems to be the new hot topic on the web and around the water coolers lately. Investopedia defines goal-based investing as: “A relatively new approach to wealth management that emphasizes investing with the objective of attaining specific life goals. Goal-based investing (GBI) involves a wealth manager or investment firm’s clients measuring their progress towards the specific life goals such as saving for children’s education or building a retirement nest-egg, rather than focusing on generating the highest possible portfolio return or beating the market”.

In 17 years, I have yet to have someone walk into my office and not know what they came in for. They always have a goal in mind. Whether it be retirement or sending their children off to University, etc. In fact, most clients often have more than one goal, so it stands to reason that each individual goal would require different planning to attain. This is where I get confused with the new trend of goal-based investing. Why is this just now becoming a hot topic? This has been happening for many years as far as I can tell, we just didn’t refer to it as goal-based investing, we called it planning. We had retirement plans, education plans, and any other type of plan that our clients asked for. 

The way I see it, if your goal is to retire in 10 years with $2,000,000, an advisor will engineer a savings plan to illustrate how to meet your goal. The plan will assume some variables such as inflation and rate of return. As long as the advisor creates a good plan and doesn’t get greedy with his assumed rate of return or underestimate inflation, there is a good chance that you will accomplish your goal if you implement and monitor the plan. So, is goal-based investing really any different than retirement planning which has been around forever? To me they sound like the same thing. 

Most articles I read on this topic go as far as to suggest that rate of return is not important to a pure  goal-based investing. I find this somewhat difficult to believe. Yes, I believe in a well thought out conservative plan, but to go as far as saying performance is not a factor is going too far in my opinion. We as advisors need to keep our clients focused on their goals and not purely on investment performance, but I still believe that performance is a key factor in keeping your clients happy regardless of whether or not they are on track to meet their goals.”


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1 Comments
  • Reasonable-Investor 2017-03-03 1:13:37 PM
    Just saw this, and I like the response. In the past, financial plans were simply taking capital available, and assumed savings rate and then applying a rate of return based on historical asset class returns. Voila your plan.

    Given that we are heading into lower expected returns for the future, and research illustrating that past performance actually has no relationship (correlation) to future returns, we have switched the narrative to goals based planning now. In other words, let's not worry about the portfolio returns. Great way to frame the narrative and try to keep the assets sticky at the big banks and their firms. Just like the old "buy and hold". Bottom line is returns to matter to your plan or goal.
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