Are you actually engaging in goals-based wealth management?

A new paper explains how it differs from the traditional approach, as well as how it should be done

Are you actually engaging in goals-based wealth management?

While most financial advisors would profess to keep their clients’ financial goals in mind, it’s more likely that they’re actually pursuing a traditional, sub-optimal approach to wealth management — and they don’t even know it.

A recent white paper from SEI, titled Coach through Biases — Yours and Your Client’s, set out some key differences between traditional wealth management and goals-based wealth management.

“In the discovery process, the advisor asks a range of questions, and the client answers,” the paper said. “When fully engaging clients and executing a plan for those goals, though, a holistic goals-based wealth management approach can differ from the traditional approach many advisors employ.”

One key differentiator is the emphasis on risk — specifically, highlighting the possibility of not meeting financial goals as well as the investment risk required to meet particular goals. This flies in the face of long-held industry approaches that simply look at measures of performance like standard deviation, tracking error, and value-at-risk.

“Client perceptions of risk are often driven by emotions and, therefore, are easily misunderstood or discounted by professionals who take a strictly rational approach to the subject,” the report said. To avoid misunderstandings, it recommended that advisors word their risk-profiling questions carefully to assess their clients’ attitudes without introducing biases.

A distinction was also made between risk aversion and loss aversion, with goals-based wealth management aimed at striking the right balance of risk exposures to achieve financial objectives and cover future liabilities. According to SEI, that means having an individual investment strategy and time horizon for each financial goal, as opposed to coupling all goals and risks into just one modern portfolio theory (MPT)-based strategy created from a separate risk-tolerance questionnaire.

“Survey responses show that nearly all (86%) advisors align individual portfolios with individual goals,” the report noted, referring to a survey it conducted in April that garnered over 600 responses. “Yet, curiously, according to our survey participants, 52% of advisors manage only one or two portfolios per client.”

Implementing just one portfolio for a client with multiple goals, the paper argued, prevents the client from measuring their progress to goal or understanding how the portfolio relates to their goals. That lack of clarity heightens the risk of client panic when the financial markets behave unpredictably.

In defining the goals of a given client, SEI recommended a co-planning approach that distinguishes wants from needs, and further divides them into objectives for now and objectives for later. For each goal, advisors and their clients must:

  • Discuss the importance of the goal;
  • Define the time horizon and the desired outcome;
  • Determine acceptable percentage probability of failure;
  • Choose the metric for reporting/evaluating performance; and
  • Assign a dollar amount allocation

The report also underscored the importance of touching on behavioural biases and how they affect investment outcomes, as well as getting the client’s agreement to stay the course in pursuit of their goals.


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