Regulators are increasingly asserting that financial advisers must provide solutions that directly meet their clients' financial goals. At the same time, investors are demanding a better customer experience and more personalised services.
These shifts are causing headaches for advisers whose portfolio management is focused on using an investor’s risk tolerance to create an optimum asset mix of defensive and aggressive investments to maximise returns. Selecting investments based on a client's willingness to accept a certain risk level fails to deliver on their actual financial needs. The issue is most evident when a less risky asset allocation would provide a client with satisfactory returns for their requirements. Or conversely, if a client were to forsake their long-term goals due to an unwarranted fear of the markets. We explore this in our other article, Are Risk Profile Portfolios Heading for the Rocks?
Advisers that continue to adopt strategic asset allocation may find that they fail to meet their clients' best interest duty. Furthermore, the soon-to-be-enacted Design and Distribution Obligations (DDO) put further compliance emphasis on pairing investments with client goals.
The likelihood of increased regulatory focus on the actual delivery of client's best interest practices is growing now that the economy has reached an inflection point. Rock bottom interest rates and record levels of fiscal stimulus are likely to put pressure on inflation. Many economists and leading investors are concerned that financial markets are becoming detached from their long-term historical benchmarks.
There is a solution to potential disconnects between historical market performance and a new financial reality. It is to link an investment portfolio's risk, return and income objectives, and time horizon, to the client's actual money goals rather than to an asset benchmark. When used to implement a Goals Based investing philosophy, such portfolios go a long way to ensuring that clients can achieve their specific investment goals within allotted timeframes, rather than exposing their capital to unruly market forces.
A Goals Based investing approach ordinarily segments portfolios into assorted 'buckets', with each bucket designed to meet distinct return and income targets across various timeframes. Advisers allocate each client's capital across the range of buckets to match cash flow and liability requirements – ensuring that funds are available for the client's various investment goals when needed. The bonus of the bucket approach is that clients are more likely to accept higher risk to meet their less critical and longer-term goals since their primary needs are likely to be met. This increases the chance of comfortably achieving long-term goals and lowers overall investment risk. Investors are saved from selling assets from the long-term buckets during inopportune market conditions to meet pressing cash flow requirements.
Dynamic Asset provides a whole-of-adviser-business Managed Account solution that is engineered to help advisers match client goals. There are five actively managed portfolios on offer, each being specifically managed to target a specific outcome with minimal volatility. Dynamic Asset's Goal Solver Tool directs advisers to assess client's personal needs by asking questions, such as 'how much do I need in retirement?' and 'what rate of return do I need to get there?'. Advisers can then use Dynamic Asset's propriety online Portfolio Construction Tool to build an appropriate asset allocation that not only meets each client's particular goals, but satisfies the adviser's regulatory and code of ethics requirements.
If you would like to discover how the right investment portfolios can help you easily and efficiently match clients with their goals, contact Dynamic Asset today.