The difference in goals-based planning

The world of financial advice is undergoing a significant change. At the heart of this, is a focus on putting the needs of the client first. Professional service firms have undergone a shift to become much more client centric and wealth management is no different. From the second half of the 20th century, the emergence of traditional investment and financial planning advice has helped many people to make better financial decisions. However, the limitations of simplified data gathering, linear cashflow projecting and risk appetite analysis has led to the search for a better solution.

Goals-based advice is different. It addresses the deficits of traditional investment and planning by putting the client at the heart of the advice. It delivers, in plain language, what matters most to clients through an easy to understand framework and can identify and solve trade-offs where they occur. So, what’s involved?

A conversation about your goals

The first and most important step is to understand what each client’s unique financial goals are and the resources required to achieve them. We sometimes fail to fully consider these issues but it is important to assess what success really looks like in our lives.

Examples of goals include:

• a desire to have the flexibility to retire at 60 with a net income of €100,000, or
• a planned home renovation in 5 years which will cost €50,000, or
• the intention to fund children’s second and third level education costs.

Most goals are specific (i.e. a euro amount or amounts) and time bound, but some are not, such as a desire to improve the financial literacy of children so that they may manage their own affairs.

Some financial goals are more important than others and prioritising is a key part of the process.

Understanding risk

There are two key elements of risk in goals-based advice:

• Risk tolerance – what level of investment risk is the client comfortable with
• Capacity for risk – how much risk the client can afford to take

When it comes to risk, goals-based advice differs from traditional planning as it does not assume the same level of risk for all investments. Investors may have multiple attitudes about risk depending on the objective – a ‘critical’ goal may require a different investment approach to those goals that have been identified as less important. For example, a children’s education fund may have a lower risk profile than the portfolio set aside to save for yacht to enjoy in retirement. However, it is still important that the overall investment portfolio designed to meet multiple goals aligns with client risk appetite.

Advice delivered in a way that you can easily understand

The process gives a clear understanding of:

• the goals to be achieved
• the actions required to achieve goals
• the level of risk that is appropriate in investing to meet goals

Once these are clearly defined, the final step involves answering two important questions:

• What is the likelihood of achieving these goals based on the approach currently being taken?
• If the likelihood is low, what actions need to be taken to increase the probability to an acceptable level?

Examples of actions that may need to be taken to achieve goals include increasing savings, increasing diversified risk (but within risk tolerance) or delaying expenditure. It’s this focus on the factors that can be controlled rather than on those that can’t, such as short-term market movements, that helps to drive better client outcomes.

Goals based advice improves upon traditional approaches by agreeing common objectives between clients and advisers, aligning portfolio risk with goals and managing behavioural biases. It starts with a conversation about what is most important to you. The outcome is holistic, client-centric advice delivered through a tailored goals-based financial plan.