“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.
But the process of goals-based investing has its own risks and challenges. One highlighted by Mr Farlow is management of client expectations. “We have seen a couple of funds recently which have changed their objectives to more CPI-focused from composite benchmarks or peer groups.
“But the actual investment process has not changed. I think while people may say ‘okay I’m going to get CPI+ 4 per cent,’ they might see that as a target. It is kind of managing their expectations that they may not get 4 per cent above inflation every year and it is likely to be more volatile than that.”
Another risk with goals-based investing is customer’s lack of understanding of how a fund manager is going to achieve a promised target. “How a fund manager achieves a certain target is radically different from fund to fund,” says Mr Samouilhan. “I think that means that, while the outcome might be easier for clients to understand, it does mean some homework needs to be done in saying, ‘do I understand broadly what the person is trying to do to get that?’ and ‘am I comfortable with that particular style of investing?”
While each individual may have a different goal and thus a different risk tolerance, with investment of this kind, financial advice tends to play an important role in guiding investors to make the right decision. However, the first step is to set those goals. And then it is time to let go of those clumsy envelopes.