Goals-based advice requires a business model completely different from the traditional approach to running a financial advice firm. But adopting it provides a useful opportunity for practice principals to re-think how they run their businesses to make sure they offer services that meet consumers’ – and regulators’ – needs.
Goals-based investing involves clients working towards a pre-determined financial objective. For instance, a client may want to have unencumbered assets to the value of $1 million by the age of 50.
Most financial advice firms used to operate a funds-under-management business model. The aim was to attract clients to the business to expand the pool of funds managed by it and make as much money as possible for clients. This model was based mostly on commissions earned on funds under management.
The industry has now moved towards a fee-based model instead. Goals-based investing aligns with fees, given a client’s goal may not always be to produce the highest possible return; for instance, a client might want to extinguish all unproductive debt by a certain date. This would not produce a commission, so it makes more sense for the business to charge a fee for service, to ensure advisers are appropriately remunerated.
More sophisticated performance management also is required, given goals-based strategies mean advisers won’t be measured solely on the quantum of funds they attract to the business. Practices measure client retention, satisfaction and referrals, rather than just how much money comes through the door.
It’s a massive shift. Practices that offer goals-based advice are re-thinking the way they run their company and engage with clients.
The advice process made simpler
John Molnar, private client adviser, ipac South Australia, argues that a goals-based approach allows a practice to create a simpler advice process.
“Advisers help clients create clear and relatable financial goals,” he says. “Through this process, clients understand the true value of advice and see they gain value for money in the fees they pay.”
It’s an approach that can also lead to better compliance and risk management.
Molnar says: “We can confidently define clients’ goals and objectives in their own words, and clearly outline how the resulting advice helps achieve these goals. This translates into a much simpler and clearer documented advice process, which is a breath of fresh air, from a compliance point of view.
“Long-term clients are usually the best referrers. They’ve gone through the goals-based advice process and believe in the value it adds on a personal level. It is only natural they want their close friends and family to share their experience.”
New engagement model
At the start of the relationship with a goals-based client, spend time developing a full understanding of any upcoming life events that could affect their ability to reach their goals.
“This may take some time, as they need to feel comfortable disclosing personal information,” Michael Rowland, principal, Rowland Financial Advisory says. “This process is made a lot easier if the client is actively involved in building the strategy and not just on the receiving end of one.”
There also must be less focus on investments and more focus on strategy. “Investments are the by-product of a strategy developed with the client’s goals in mind,” Rowland adds.
Additionally, if a client’s goals are not realistic, the adviser needs to be able to explain why. It’s also important for advisers to be able to handle the situation if goals are not met.
“Find out why. Mostly it will be because something unexpected has happened,” Rowland says. This might include a relationship breakdown, for instance.
“These things happen. If changes in circumstance are identified early, it should be relatively painless to get clients back on track,” Rowland says.
If the client does miss the target, use tracking technology to show how missing contributions or redeeming funds affects long-term goals. Then provide options to demonstrate what needs to be done to get back on track.
Regular contact is vital to make sure you’re across any changes to the client’s circumstances that might make them miss their goals.
A tailored approach
If clients are using a goals-based philosophy, they won’t necessarily be aiming to reach a certain level of wealth, so it will be important to celebrate small wins along the way.
“Often, goals are set over a long period of time, so it’s important to acknowledge steps achieved along the way,” says financial planner Lisa Duggan from Epona Financial Guidance. Encourage clients to celebrate when an important goal is met, like extinguishing a mortgage.
Goals-based advice is a model that requires complete client focus, new performance measurement systems and a fee-based business model. It takes hard work, but it can be very rewarding for clients and advisers alike.
