Insight #51 Goals Based Investing – what does it mean for fund managers?

What is goals based investing?

Quite simply – goals based investing is setting personal and lifestyle goals and using the financial advice process to produce these outcomes.  Taking it a step further fund managers are now developing products that can offer one stop solutions for goals based investing.

The most common ‘goals’ that investment strategies/products need to meet include income, holidays or leaving an inheritance for family.

The key differences of goals based investing vs a retirement only objective are:

  1. For advisers, the client is much more involved in the setting of the strategy and the focus is on needs not risk tolerance
  2. For the fund manager success is not about meeting benchmarks or beating competitors but instead meeting the client’s ‘goal’ – quite a different mindset to how fund managers are currently measured and compared

Is it just a fad?

Goals-based investing has been on the agenda for years but now firms are actually stepping up to offer strategies and products to address the demand.  A report from David Blanchett from Morningstar says that ‘….goals-based solutions have nearly doubled since 2012[1]. What was once a passing trend has quickly become the status quo in the US.”  And in Australia there are fund managers that are developing and offering products to meet this demand such as AMP and UBS and on the advice side, financial planning company Ignition Wealth has become the first Australian ‘robo-adviser’ to offer goals-based investing. Ignition Wealth has appointed SiResearch to provide adaptive asset allocation built around goals which have a specific objective and timeframe. The goals-based model acknowledges that investors’ goals may fall into several buckets including short term, medium term and legacy.

Benefits of goals based investing

  • Goals make it far more likely you’ll save for each goal in advance—which makes you more likely to achieve them
  • Goal-based investing ideally matches your time horizon to your asset allocation, which means you take on the optimum amount of risk and not more
  • Goals based investing nicely takes into account behavioural finance and Modern Portfolio Theory to optimise outcomes for ‘retail’ investors. Modern Portfolio Theory does not accommodate for illiquid assets which can be used as key investments for goal based investing. Goals-based investing tries to marry Modern portfolio theory—the foundation of most asset-allocation strategies, first introduced by Nobel Prize laureate and economist Harry Markowitz—with investor behaviour ie. behavioural finance. For more on this a great research paper that we recommend reading is Beyond Markovitz by Ashvin B. Chhabra. https://www.regions.com/virtualdocuments/beyondmarkowitz_wealthmanagement.pdf

Goal based investing – what does it mean for fund managers?

The good news is for fund managers is that they can utilise where possible their existing product range to offer goals based investing solutions. This will be more applicable to larger fund managers where a range of funds across different asset classes is offered.  An example is AMP Capital where outlined below is how they match investors ‘goals’ with their product range. 

Goal 1 – Essential needs

  • Drawdown solution – cash management fund
  • Essential needs – corporate bond fund, equity income fund

Goal 2 – Lifestyle wants

  • Multi asset fund – used to grow wealth and protect on the downside

Goal 3 – Legacy aspirations

  • High growth fund which allows compounding of wealth over time

Where to from here…..

There are many criticisms of goals based investing – the key one being from the advice community that isn’t goals based investing what they do every day and goals-based advice should be considered the foundation for every financial planning business? In other words, it is not a new concept, fad or anything else.

For fund managers:

  • Be aware of the rise of goal based investing and have these conversations with your investors and clients
  • Review your product range and work out what could be suitable for goals based investing – each goal because it has a unique time horizon, has its own asset allocation and its own risk profile. You may have something to offer here.
  • Be aware that there are lots of ways to define goals-based investing and many ways to implement it – you may just have a solution

 

 

[1] http://images.mscomm.morningstar.com/Web/MorningstarInc/%7B66f57d08-9e45-45e7-b8d1-56b21f9185f8%7D_Morningstar_-_Blanchett-_Seven_Steps_to_Goals-Based_Finanical_Planning.pdf

About Gateway

Gateway Financial Marketing (Gateway) was established in February 2004 by Amanda Rethus and Edwina Best for the purpose of offering fund managers, other product providers and international new entrants, expert advice, services and assistance in negotiating entry into the Australian Retail Financial Services market. Use of Gateway’s services provides the opportunity for clients to overcome the hurdles that can often confront fund managers when transitioning from institutional to retail and hence improve participation in retail funds flow. Prior to Gateway, Amanda and Edwina spent over 30 years combined with major institutions in the financial services market.

Our qualifications

Amanda has over 20 years’ experience in the Financial Services industry and was formerly a Divisional Director in the Financial Services Group of Macquarie. Amanda managed investment portfolios for over 10 years, and has spent in excess of 10 years introducing investment products to the Australian Retail market.

Edwina has a Bachelor of Business from UTS majoring in Marketing and International Business. She has over 15 years’ experience in the financial services market, concentrating in relationship management, product management and marketing. They both have extensive contacts in the retail financial services market especially with key decision makers. If you would like to confidentially discuss your current approach to the Australian market or have any questions on the above please do not hesitate to contact us on – Edwina 0404 046 179 or Amanda or 0414 658 323.

Disclaimer

This information speaks only as of the date it is given and the views expressed are subject to change, due to factors such as market and industry conditions. There is no obligation to update the information in this article. The information, whether taken from public sources or elsewhere, has not been verified and we have relied upon and assumed without independent verification, the accuracy and completeness of the information.

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