Investors are more knowledgeable about the market and their portfolios than ever before. They can see that not all is right in the world and there is an air of fear and doubt sweeping through many financial conversations.
A significant challenge for advisors has always been to manage investor psychology. Building trust and creating a secure relationship with investors can be hard. You are faced with the barriers of managing expectations, maintaining a verbal relationship, staying on top of the current market information and navigating the emotional barriers of each investor. Now, with current market conditions this challenge is looking increasingly more concerning. How do advisers stop their clients from becoming their own worst enemies, and keep them on track with their investments?
Enter goals-based investing. Linking investors to their goals and those goals to investments allows advisors to build a relationship with their investors that can be both financially and emotionally rewarding. By listening to your clients about their aspirations for their money and plans for their future, you will be able to diminish that element of emotion significantly.
You are focusing them on a trajectory of hitting goals, rather than following the market peaks and troughs, they have a focus that is unwavering and personal to them. By giving them something to push their money towards and understanding their reason for investing, you can lessen the concern over market movements, growth investing and loss of investment. The rises and dips will hopefully be smaller and more easily navigated, but the focus is that the end goal remains in sight for them.
Goals-based investing is dynamic and forward looking. It’s reliance on investors’ goals rather than benchmarks means it comes with strong downside protection. The distractions of volatility are replaced by conversations around reaching personal targets. Goals-Based Investing is dynamically adjusted, to focus on an absolute return against the goal and mitigate risk. It aims to maintain a smoother trajectory towards the target result.
The major drawcard of goals-based-investing for your clients is that it brings them right to the forefront of their investment. Speak with them about their reasons for investing and find out what targets they are looking to hit. They are not competing with benchmarks or markets. They are looking at their investment wish-lists and working with their advisors to tailor a lower-risk way to achieve them.
Client-centric portfolios can be combined to reach various goals at every age and stage of investment lifespans. (read here: the right age to invest) Clients can be clear and focused about what their objectives are for their money and advisors can dynamically champion their portfolio with a mix of shorter and more long-term solutions to climb to those goals The right blend if growth and risk management to align their investments to each goal and give them comfort they’re on track. By setting themselves achievable investment aims, investors will see a sense of purpose with their investments and feel more freedom financially. The right goals-based advice will help them lay out their financial future in both the short and longer-term periods with portfolios to fit each stage. They will be able to use Cash or Short-Term portfolios for reachable goals with the next month to three years whilst still seeing the effects of a long-term wealth builder portfolio over the next ten or so years. Investors can save for the immediate cash needs or once-off expenses in their near future whilst still finding financial security in their later years.
Goals-based investing doesn’t eradicate fear in investment; it allows for it, by dynamically addressing the changes in external and internal cash flows and developments. It is focused on only one thing: your investor’s goals and since it comes with a relatively low volatility it lessens the fear of investment, resulting in less capitulation at the wrong time and less greed in purchasing. As with any investment portfolio, even Goals Based, there will be an element of volatility that investors need to reconcile themselves with. Advisors can explore the essentials for overcoming these barriers in initial conversations with their investors. Professional management of these goals-based portfolios provides discipline, removes bias and stops extrapolation. Also, with lower volatility and cash bucket allocation, investors will see a reduction in sequencing risk as their wealth is built and/or protected for specific retirement goals. Investor can see clearly on their trajectory what they are saving for and how they can reach it, rather than obtaining it and having to deal with the consequence afterwards.
As an advisor, Goals-based investing can be beneficial for getting your clients ahead of the game, rendering the game obsolete. Their investment success depends on their own trajectory and you have removed the element of “the market”, that everyone fears so much. Your investors aren’t rushing to compound their mistakes by investing money into an arbitrary fund at the end of the road, they see immediate correlation to their plans for the future.
By empowering your clients and making them a part of the process of their investment, they are likely to feel an increased connectedness to their financial future, and therefore, a sense of control. The money they spend is guilt-free, acquired with the specific goal in mind instead of spent and paid for afterwards. By driving investors towards their specific goals for their money, you have safeguarded them against the market, and themselves. That’s a change both investors and advisors can gain from.
RELATED CONTENT
- Investment approach - Advisers
- What to expect from Goals Based Investing
- Dynamic Asset - Adviser Home
