Wealth trends 2021: Goal-based investing

Then, instruments and strategies are suggested to meet them within the risk parameters best suited to that specific customer. With goal-based planning, the planning happens backward from an expected end-result. The outcome is the focus and not the method or the tools. Goals can be myriad - ranging from wanting to have a summer cottage by 2030, achieving retirement by the age of 45, creating a sustainable pension payout etc. A goal-based planning approach enables tailored fitment. The customer's aspiration and not cashflow is now at the centre of the universe.

This requires a diametrically opposite change in the way financial advice has been rendered till now. Generic and commoditised advise dished out earlier is obsolete. Financial advice has to be now tailor made specifically for the unique condition sets for an individual customer. To make things more grounded and transparent, the customer needs to know the probability of achieving the goals and the actions needed to optimise the chances.

Ronald Janssen of Ortec Finance says, "Goal Based Planning is based on a client centred approach. The personal goals of a client are translated into an optimal investment plan. In many cases the savings account delivers not enough return, so consumers must take risk to have a realistic probability to realise their goals".

The customers want or at least need a perception of being “in control” of own aspirations and methods to finance the same. Technology makes it possible to have real-time analysis of the progress, potential corrective actions in case of divergence, instrument options and availability, risks, costs etc. These multiple dimensions of viewing finances has imbibed an objectivity into the thinking process. Now, financial planning is no longer a subjective esoteric process. All parameters goals, returns, risks, divergencies from plan are measured in cold numbers. All “safety nets” in terms of hedging, diversification and other risk management protocols also has to be clearly defined. This gels well with the new digitally savvy and financially aware customer. The one who listens to his financial advisor but now questions, tracks, verifies and completes several routines in self-service mode. 

This is a new and tricky situation for the wealth manager. Information overload is a double-edged sword. A false sense of confidence with a know-all attitude of this “Robinhood” trading generation can easily slip into foolish bravado leading to financial havoc. Having too many options could also mean constant switching of financial advisors as well as financial strategies. For goal based investing the customer should know their goals to start with. Furthermore, they should also be able to articulate the goal in tangible manner in financial terms. This is easier said than done. As Michael Kitces & Carl Richards argue that we humans are not tuned to visualise a future vastly different from today. In their podcast they present the idea of possibility-based planning that helps customers discover their goals with meaningful dialogue.