CPD: 2017 – the year of goals-based advice
Originally published in AdviserVoice.

“Goals-based investing”: it’s a concept that’s gaining increasing currency in investment and financial planning circles and attracting more and more attention. And, when you look at its underlying precepts, how goals-based investing plays out in practice and the potential benefits it offers for individuals, advisers, and the industry at large, it’s easy to see why.

Despite the positive evidence and opportunities on offer, in our change-fatigued industry the prospect of adopting – and adapting to – new ways of thinking about investment and providing advice can meet with mixed responses.

The good news is that as the industry is coming up to speed and the concept is gaining wider understanding, more and more progress is being made in terms of both developing goals-based investments and, importantly, in embedding genuine goals-based approaches into the advice process.

Here’s a rundown on the current state of play.

What is goal-based advice?

Goals-based advice takes as its underlying precept the very specific financial needs (goals) of a client, then looks at ways to support achieving them. The success or otherwise of recommended investments is then judged according to how well they meet those specific goals. A client may have a range of goals, over different timeframes, with multiple risk capacity and appetite which can rise and fall depending on a range of factors.

It runs somewhat counter to the more “one-size-fits-all” approach that results from some of the traditional advice processes. These tend to use only one dimension of risk profiling to group clients into broad “baskets” that assume single overarching goals. These are then judged against external standards – say, to beat a particular benchmark or reach a particular level of return.

Typically, this might be clients with high risk tolerance into one high growth basket; while more risk averse clients or those focused on capital preservation might be positioned in a more “defensive” portfolio.

Why has goal-based advice emerged?

Broadly, goals-based investment has arisen in response to the massive shifts in the investment environment that we’ve all experienced in the past ten or so years. It’s now clear that we are working in what’s been termed a “new normal”; a world where the traditional understanding of the way markets work and how investments and advice should be tailored to suit has irrevocably changed.

A major catalyst for change was the Global Financial Crisis (GFC). Its effect can be seen in a number of ways.

First there is the upheaval and losses it wrought in and of itself, the toll it took on individuals and the community. The resulting crisis of investor and investment confidence is one that the entire financial services industry has been seeking to address ever since.

Second, at an academic level, the GFC revealed fallacies in traditional thinking about the behaviour of markets and asset classes. When so-called “defensive” and “growth” assets began to correlate, portfolio diversification benefits dematerialised before investors’ eyes. It was a “new normal” that turned traditional portfolio construction – and efficient market – theories on their heads. The time was ripe for new thinking, research and analysis that would prepare investors for the “new normal” and support the development of investment options to match.

Third, and linked to point one, the GFC revealed serious deficiencies in culture, probity, legislative and regulatory effectiveness in some areas of the financial markets and the financial services industry. We have been dealing with an ongoing raft of legislative and regulatory changes designed to address this ever since – and these in turn, have required us to change the way we operate. On the adviser side, enshrinement of fiduciary duties calls for deeper engagement with and understanding of individual clients’ circumstances – to the point where, arguably, offering advice modelled on passive approaches targeting averages or market returns simply may not fit the bill. For investment managers, there is a real need to develop new options that can deliver in the changed environment – and, more specifically, in line with client goals.

Why is it important?

This backdrop of change and upheaval we’ve all experienced as an industry highlights the importance of a goals-based approach, because a goals-based approach offers an alternative way forward for advisers, investors and investment managers.

Properly executed, a goals-based approach can help advisers rebuild confidence in the profession and deliver trust, relevance and value in the most compelling way of all, hitting home with investors by delivering on their personal financial goals. Clients don’t think in terms of traditional financial performance models or how their investments performed relative to the market: they care whether they are on track to meet their personal goals in the desired timeframe. In an increasingly complicated environment, this level of trust is something all advisers are aiming for. More widespread understanding among consumers of the value of advice is a win for our entire industry. It is up to us to pursue means and mechanisms to earn that trust. Goals-based investing is one of them.

The challenges of implementing goal-based advice – and how to meet them

Any change to the way you run your business, whether on an operational or philosophical level, will bring challenges (and most of us have already seen a few). Embedding goals-based investing and advice into your firm is a prime example.

While it’s possible to implement goals-based advice at an individual level, scaling is seen as a significant challenge that inhibits wider adoption, especially for larger advice practices, where access to financial technology solutions which genuinely address all facets of the advice chain are a must. On the other hand, let’s not pretend that the issue of scale relates only to goals-based advice. It’s a persistent conundrum for the entire industry. Unmistakably a vital part of the solution, as agreed by key industry bodies and regulators alike, is technology.

It’s past time for advice firms to explore and embrace what’s out there, and there’s no shortage of fin-tech firms intent on filling the gaps. While there may not as yet be an end-to-end solution, it seems clear that the hunt for goals-based robo-advice style technology is now on. The firms that reach out to find ways to automate aspects of their advice in line with goals-based precepts will be well positioned for the future.

Currently, advisers need to operate across different platforms to access the data required to provide accurate advice. Ideally, new tech targeted at independents will address such compatibility and integration issues.

There are also some regulatory hurdles, specifically relating to ongoing requirements for advisers to stick to traditional risk-profiling metrics. Clever solutions that address the traditional but can be faithfully adapted to deliver more meaningfully are called for, along with continued liaison with regulatory bodies to ensure their requirements keep up with the latest in best advice practice.

Linked to potential regulatory concerns are the inevitable concerns about professional indemnity insurance. Ensuring a fully documented, step by step approach to providing advice which starts and ends with compliance – and is undertaken in full and open consultation with insurers – is the key here.

How can you make goals-based advice happen in 2017?

If you or your firm wants to explore the possibilities offered by goals-based advice, consider the following action:

  • Ask your investment managers/providers if they offer goals-based investment options. If not, ask: why not? If so – consider where they may fit with your firm and clients.
  • Focus on research, analytics, education and ongoing training that will help your business better understand and implement goals-based approaches where appropriate .
  • The Association of Goals Based Advice (AGBA) aims to facilitate the key players in the Goals Based Wealth Management Industry and can be a vital source not just of information, but also contacts with other Advice practices that are adopting Goals Based Investment strategies.
  • Welcome technology and explore the options – there’s no longer any doubt that making the right fin-tech choices will be a key to success.

Finally, embrace the challenge and be part of the evolution. The ability to deliver more value, more relevance and better outcomes for investors is something our whole industry should be striving for.


Take the quiz to earn 0.25 CPD hours.