However, sometimes investors can have multiple or conflicting goals. In these situations, rather than pooling all of investor’s assets into a single portfolio, financial advisers create a separate portfolio for each goal. The risk tolerance for these portfolios depends on the investment objective of the client.
“We think, from an end client, perspective, there are really only two broad aims,” says Nick Samouilhan, senior fund manager, multi-asset funds at Aviva Investors. “It ties up to what you want to do, where you are in life. If you are saving for something, saving for retirement, saving for a holiday, that is all about growing your capital. That is the first goal. The second is, once you have got some capital, how you live off that and not erode it over time. That is drawing an income from it. We can talk about it in different ways and phrase it differently, but ultimately, those are the two goals, which everyone has.”
While there has been an increase in goals-based investing, other events such as the introduction of pensions freedoms in the UK have also had people looking to their financial advisers for help in building their retirement pots. “Pensions freedoms have had quite a lot to do where the government has turned things around and said we are not going to look after you, and people need to take responsibility for their own retirement,” says Mr Farlow. “That means the onus is on the individual and that means them understanding what they’re going to get.”
This has led to a large number of people saving for their retirement and seeking advice from financial advisers to grow their pension pots. “Setting a retirement goal isn’t so much about asking people how much they need in retirement; rather will they have enough to maintain the lifestyle they feel they deserve,” says Simon Smallcombe, UK managing director at AXA Life Invest.
“It is about ensuring that the planning and advice they have received matches the client’s needs and demonstrates value. From our own research, we know that most people are risk averse and become more cautious as they get older. We also know that over three quarters of UK savers would be willing to pay 1 per cent more each year towards their pension pot in exchange for a guarantee on how much retirement income they would receive,” he says.
So how does one set up a process towards implementing a goals-based approach? According to Jean LP Brunel, a US-based wealth manager and expert on goals-based investing, setting up a goals-based process is repetitive.
The first step is to identify and describe the client’s main goals. This includes ‘needs’, ‘wants’, ‘wishes’ and ‘dreams’, ‘nightmares’, ‘fears’, ‘worries’ and ‘concerns’. The second step is to identify their respective time horizons, followed by identifying related cash flows or bullet payments. The final two steps include identifying the lowest funding cost for each goal and then finally deriving assets needed to meet each goal.