Goals Based Investing (GBI) continues to gain recognition and be better understood amongst advisers. In his article Goals Based Investing: Should it be the norm? Giuseppe Ballocchi describes GBI as the way of the future for financial advice. Are we finally seeing a shift from the more traditional Strategic Asset Allocation approach to GBI? The simple answer is yes. Why, because it makes sense. Client goals should determine investment decisions. And, there is a rising school of thought that SAA investing will not suit likely market conditions going forward.
Delivering on investor goals
When a client engages with a financial adviser, they typically have three key objectives. Peace of mind, capital protection, and investment growth. Given these common investor goals, logic would suggest, the chosen investment strategy should target specific outcomes while best manage risk in volatile markets and build with downside protection. Despite this, the standard approach to investments is to create an “optimal” Strategic Asset Allocation (SAA) to match a client’s risk profile.
The pitfalls of SAA
Historically, while it has yielded results in rising markets, SAA is by no means infallible. In today’s turbulent markets, the effectiveness of SAA has never been more compromised. The challenge with SAA is it does little to deliver on the client’s need for peace of mind and capital protection. Investment growth has also proven to be challenging under SAA in tough market conditions because it doesn’t forecast for future market dynamics. Shroders' report Why SAA is Flawed delivers a solid explanation for such reasoning. Shroders takes a typical “balanced” portfolio of 60% growth assets and 40% defensive assets with an objective of 4% to 5% growth over a five to ten year period. The research concludes that SAA did not meet its objectives approximately 47% of the time. A 47% failure rate is significant when you are working to build client satisfaction and grow your business.
There is a better way
Now, given that Goals Based Investing is more commonly understood as the logical client-centric approach to advice and investing, how does it stack up in the long run? And how can you be confident GBI will increase client satisfaction and help grow your business? After all, it’s no secret that happy and satisfied clients lead to better outcomes for your business.
Goals Based Investing (GBI) uses Dynamic Asset Allocation (DAA) which works by ensuring portfolios remain focused on the achievement of the investor's goals – be it risk, growth or managing timing of cash flows. Being selective about investments and ensuring they are dynamically managed to suit the conditions is a priority. Portfolio managers need to stay across the geopolitical challenges, such as the USA and China trade wars and Brexit, and risks presented by central banks. All this active management is hard work, but it can be done when handled by experts experienced in Dynamic Asset Allocation.
Jerome Lander, Dynamic Asset’s portfolio manager, has delivered excellent risk adjusted returns for the Dynamic Asset’s portfolios, demonstrating the positive impact dynamic asset allocation is having on investment portfolios and, as a result on advice businesses. For example, in the August results Jerome commented that “While we witnessed more market interventions, massive buying of bonds, and a stock market sell-off, all in addition to negative returns from markets, our portfolios delivered positive results and also protected capital.”
These strong results highlight the differences between the typical manager and Dynamic Asset Allocation when operating in harsh market conditions. DAA is all about minimising losses and protecting capital during downturns. Positive results, in challenging times, are consistent with Dynamic’s history. Put simply, DAA usually does relatively better when broader markets do poorly.
Read What to expect from Goals Based Investing to learn more about how Goals Based Investing differs from SAA during different stages of a market cycle.
Flexibility and frequency
The foundation of Goals Based Investing and DAA is flexibility. Because GBI focuses on individual needs and life goals, a client’s portfolio mix will vary depending on circumstances, such as age, risk tolerances and the returns they need to achieve their goals. While some will be weighted towards capital protection, others may be looking for growth. You can learn more about Dynamic Asset’s five discreet portfolios. Regardless of the portfolio mix and asset classes, with DAA we have the ability to change asset allocations dynamically in an efficient way to respond to shifting market conditions. All these changes happen behind the scenes on behalf of the investor and adviser providing peace of mind the portfolio is being professionally managed to deliver the outcomes with greater certainty. The result is increased investor confidence, and greater efficiencies for the adviser, knowing they have a committed team of experts working hard to support them.
Reduce effort and risk
In any conversation on Goals Based Investing it is crucial to acknowledge it is challenging. Ultimately, markets are unpredictable, and capital can be lost, so it takes hard work, resources and the right skill set to do it properly. It is the role of an adviser to work with the client to help them achieve their long-term goals, not focus on short-term market trends and difficult market nuances. Not every adviser has the skills and expertise for managing DAA portfolios, but now, with Dynamic Assets experienced team of portfolio managers and strategically focused investment committee, all advisers can access GBI. And those that have implemented the dynamic approach are seeing the benefits to their business and their clients.
So, what does it all mean? The key to successful Goals Based Advice is listening and responding to your clients' needs. Once you understand what a client wants to achieve, you can better provide fit-for-purpose investment solutions that greatly improve the likelihood of meeting their needs at any stage in life. While investment growth is a common headline topic for investors, really their key drivers for choosing an adviser are peace of mind and capital protection. While SAA was prevalent in the past, if we are to meet client objectives, and grow our own business, then Goals Based Investing and Dynamic Asset Allocation is the way of the future.
Read What to expect from Goals Based Investing to learn more about how Goals Based Investing differs from SAA during different stages of a market cycle. Or discover our full range of Adviser services.