Exclusive Preview: Goals-based Investing Survey Results

Goals-based investing

At the beginning of each New Year, many of us take personal inventory and try to set a standard for improving ourselves in the coming year by setting resolutions. I certainly have my resolutions for 2017 written up and ready to execute against – spiritual growth, family enrichment, personal achievement and career success. Each resolution has different definitions of success – and if I were to approach each resolution with the same plan, I would certainly come up short.

The process of setting and achieving New Year’s resolutions is a nice analogy we can apply to investing for the long-term. Investors have multiple goals in their investment lives, and each goal could potentially require a different approach to maximize the opportunity for success. However, many advisors still approach an individual’s goals collectively, as opposed to breaking them up into their more specific parts. This makes strategy matching and control of differing objectives more difficult and, more importantly, can lead to capitulation at the worst time.

That is why, this year, I implore advisors to adopt true goals-based investing and embrace the heightened level of specialization in investment appropriateness and effectiveness that it brings to the table.

Defining the term

Goals-based investing is rooted in understanding your clients’ goals and objectives. The argument is that a strategy can be more efficiently built to achieve a single stated objective, as opposed to many objectives at once.

In practice, goals-based investing involves identifying specific financial objectives clients want to achieve and then creating strategies that use different investment asset allocation components to help better align an investment strategy with those stated objectives. It is a granular process that goes beyond the listing of generic goals, such as “saving for retirement,” to identify specific investment objectives, such as “fund my retirement needs by generating a recurring income stream of $10,000 per month, beginning the year I reach age 67.”

There are a few keys to effective goals-based investing:

  1. Determine the appropriate breakdown of objectives such as growth, stability and distribution, as defined by the client’s personal circumstances. (The aforementioned $10,000 per month income goal is a prime example of a distribution goal.)
  2. Frame risk in terms of failure to achieve the desired outcome, versus the possibility of investment loss and then determine the client’s appropriate risk tolerance. (Using that measurement, you can then assign a strategy that the client will psychologically be able to maintain by staying invested in over full market cycles.)
  3. Build strategies that are not only different because of their equity and fixed income splits, but in the underlying components used to build the equity and fixed-income buckets. A few examples:
    • Using short-duration government securities in a stability portfolio and using core fixed securities (corporates, mortgages, asset-backed securities) in a growth portfolio
    • Supplementing a low-volatility or minimum-volatility equity component in a stability portfolio over the traditional large, small, international and emerging-markets equity of a growth portfolio

Investor perceptions: survey results

In our recent survey of high-net-worth and penta-millionaire investors, the questions focused on the investors’ perception of goals-based investing and their overall investment approaches and strategies. More than 1,100 households participated*.

The results were analyzed by wealth tier and generation. The results show that the majority of investors surveyed understand what goals-based investing is and believe goals-based investing to be the appropriate objective to be measured against. I’ve included a small subset of the finding here.

Q: What investment objective is most important to you?

Illustration 1

64% of HNW and 58% of penta-millionaires are relatively aligned when it comes to their primary investment objective that their investments lead them to fulfilling their personal and financial goals.

Q: How do you define goals-based investing?

Illustration 2

The plurality of HNW (42%) and penta-millionaires (47%) understood the term.

Q: What is your satisfaction with your advisor, based on your/their investing approach?

Perhaps most importantly for advisors, investors surveyed reported higher satisfaction with advisors who use a goals-based investment approach.

Illustration 3

Are you committed?

As you kick off 2017 and start to create resolutions for yourself and for your business, consider adopting or deepening your commitment to a goals-based investment approach. As the data suggests, advisors who take the time to help their clients have a clear understanding of goals-based investing and their approach towards it often achieve higher levels of satisfaction than those who do not.

Happy New Year, and may your worst days in 2017 rival your best days in 2016!

*Source: SEI Analysis of Phoenix Marketing International, July/September/November 2016.

SEI’s proprietary questions were fielded in July, September, and November 2016 in the Phoenix International Survey surrounding investors’ perceptions of goals-based investing and their overall investment approaches and strategies. Over 1,100 High-net-worth (HNW) and Penta-millionaire households participated in the study. Results were analyzed by wealth tier as well as generation, where sample size permitted.

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John Frownfelter

John Frownfelter

John Frownfelter is the investments contributor for Practically Speaking and the managing director of investment solutions within the SEI Advisor Network.

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