By Cyril Tuohy
It looks as if goals-based financial planning is percolating through the ranks of financial advisors.
In other words, advisors aren’t as concerned with meeting benchmark indexes as they are with making sure that investment portfolios deliver the kinds of returns investors need.
This is good news, according to one market expert, as it signals — at least for the moment — that holistic investing is on the upswing.
Matthew Coldren, executive vice president with the Client Solutions Group at Natixis Global Asset Management, said he was surprised by how high goals-based investing registered with advisors in a recent survey.
In the survey of 300 advisors, 78 percent said they encouraged their clients to set specific goals for their investments instead of meeting a benchmark. The Natixis survey also found that 84 percent of advisors agreed that clients would be happy if they achieved their investment goals over a year, even if their portfolio underperformed the market.
The survey also found that 84 percent of advisors believed that investors were more concerned about missing their investment objectives than about falling short of a benchmark.
In both cases, “That 84 percent is a positive,” Coldren said in an interview with InsuranceNewsNet.
In short, advisors appeared to have recognized that the sound health of an entire investment forest is more valuable than the health of an individual tree or species, Coldren said.
Goals-based financial planning is designed to meet specific goals set by clients and their advisors. The goals are designed to complement the health and performance of a client’s overall investment portfolio.
A retired couple looking for and receiving $1,500 a month in income from their portfolio over the next five years, for instance, have met their goal, whether their investment portfolio surpasses or falls short of market returns.
Performance-based investment planning, by contrast, is designed to outperform a market benchmark. By that measure, an investment portfolio generating a return of 20 percent in 2013 would have fallen well short of the Standard & Poor's 500 index return of nearly 30 percent that year.
But if an advisor’s investments have met the goals of generating $1,500 a month, what difference does it make what the Standard & Poor's 500 index delivers?
“Over the last year a lot of client firms we work with have put a lot of technology and thought leadership in this notion of your number or your goal,” Coldren said.
Advisors, he said, are spending time asking clients, “What would you like to do? What is your next phase of life?” Moving off the performance topic and onto the goal topic, “I think that’s a good thing,” Coldren said.
The recent survey results point to important changes in investment approaches, but it’s important to remember that the shift isn’t happening in a vacuum.
Earlier this year, John Theil, chief executive officer of Merrill Lynch Wealth Management, said there was a move among brokers to make investing simpler by shifting the emphases of the firm’s thousands of advisors to goals-based wealth management.
The company reportedly planned to spend $40 million on goals-based training.
Remember, too, that baby boomers are starting to retire in big numbers. These investors are thinking about how their investments fit with other income sources: Social Security, private savings, a defined benefit pension perhaps (for those lucky enough to have one) and an inheritance.
Questions around finding longevity and how to receive and pass on wealth require giving some thought to investment goals, not beating a benchmark.
Reputable advisors have always said investments should be goals-based. But getting that message out or convincing investors to stick to the plan is not always easy, particularly with advertising touting funds beating one benchmark or another and investors pressing advisors to move assets into higher-yielding asset classes.
The newfound respect for goals-based planning is taking place as the discussion heats up about how to secure retirement income in the asset-distribution phase of life.
For years, financial planning has focused on gathering assets and where to best invest those assets in search of higher returns during the asset accumulation phase of life.
As investors move deeper into the distribution phase of their lives, however, meeting goals and needs takes precedence over questions of investment returns.
Perhaps there’s an even simpler explanation. Investors have realized that neither they nor their advisors — no one, in fact — can beat the market over the long term.
If beating the market is impossible, better to focus on the happiest retirement within an investor’s available means, and pay advisors to secure that goal instead of trying to outperform an index.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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