Commentary from IOOF Group General Manager Wealth Management, Renato Mota
Research has shown that in the face of financial uncertainty or the lack of a clear plan, focus turns to cost, not the value, of the advice provided by advisers. Demonstrating the true value of advice, however, is more important than ever. This is why more and more advisers are embracing ‘goals-based investing’ for their clients as they look for new approaches to delivering advice.
Meeting goals, meeting expectations
Goals-based investing, in itself, is not a new concept. An advice strategy which focuses on helping clients set specific goals (and for subsequent meetings tracking progress against those goals), makes it easier for you to show – and your clients to understand – the value you bring.
This is supported by the findings of IOOF’s ‘The expectation of advice’ white paper. Our survey of over 300 clients showed 76% rated ‘achieving core goals and lifestyle objectives’ as the definition of a successful ongoing financial planning experience while just 14% said ‘better than average investment performance’.
Reframing the advice conversation around specific goals can positively impact your business, with clients who felt as though they were on track to achieving their goals and objectives almost three times more likely to refer over the next 12 months.
Greater client engagement
Part of the reason for increased referrals could be that, for many clients, tracking their investment against a tangible goal will strengthen their engagement with financial advice and provide greater motivation for saving than portfolio returns against a benchmark. Achieving a certain goal also builds confidence in the approach, which in turn reinforces the desire to maintain this approach.
Goals-based investing also addresses the fact that many clients’ goals happen at very different times and may require very different portfolios to achieve.
Goals-based investing – a new risk management approach
As a financial adviser, you would know only too well that clients, when it comes to investment decisions, can sometimes be their own worst enemy. All too often clients will sell out of investments at precisely the wrong time in response to a market downturn or volatility – regardless of how that investment is tracking towards a goal.
The ‘mental accounting’ nature of goals-based investing mitigates this behavioural risk by letting clients make separate investment decisions for each goal rather than in aggregate for their portfolio.
Further, how your client is tracking towards meeting a goal focuses on the amount of money your client actually has, rather than performance relative to a benchmark, and becomes a good reference point in times of volatility.
Longevity risk is also becoming increasingly relevant in financial advice. Goals-based investing allays this risk as it separates out goals across the different stages of retirement rather than drawing from the same pool of funds for their whole retirement.
Conclusion
Goals-based investing lets clients drive the investment decisions, encouraging them to stay engaged with their investments and look beyond the ups and downs of the traditional benchmark investment approach. For advisers, goals-based investing focuses on the more personal side of financial advice relationships and understanding more deeply what is truly important to your clients.
