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Planning, Risk Assessment And Investment Management As One

The time has come for goals-based financial planning technology to be more comprehensively interwoven with investment management.

Goals-based financial planning is hardly a new concept. Nor for that matter is behavioral finance, the roots of which go back even further, drawing its origins to G.C. Selden's "Psychology of the Stock Market," a book published more than 100 years ago.

Over the last decade or so, an increasing number of financial advisors have begun to embrace these theories. Granted, part of the reason is a series of regulatory changes that have made selling individual products less relevant – changes that could intensify given the recent U.S. presidential election results. 

But an equally important factor is the burgeoning realization among vast swaths of the industry that providing advice-based solutions—which align perfectly with these concepts—is the best way to serve clients and build a durable business.

Putting Risk into Proper Perspective 

Another factor driving the rise of goals-based advice is that it makes it easier to frame risk more intuitively. Discussions about standard deviation and how it interacts with risk tolerance can become pedantic and difficult to follow, even for clients well-versed in such statistical measures. 

The industry has attempted to solve this problem with risk questionnaires, which, in theory, should simplify the process of determining someone's risk profile. But the problem with questionnaires like that is that they force clients to take a narrow view of risk: It becomes all about how much they are willing to lose. 

That, by consequence, turns many of them into market watchers, which means each time the S&P 500 wobbles, they are far more likely to nudge their advisor to make mistakes on their behalf that can be difficult to unravel in the future. 

By contrast, a goals-based approach puts risk into better perspective. If a client is saving/investing toward a particular goal, the short-term volatility of their portfolio is almost immaterial. The more critical considerations are whether they are on track and the likelihood of achieving their ultimate objectives.  

While some clients will undoubtedly continue to have market volatility-fueled anxiety from time to time, focusing on goals, which act as a north star that contextualizes each conversation, makes it easier for advisors to allay their fears. 

The Achilles Heel of Today's Offerings

Even as fintech investment has surged in the industry, very few firms and advisors can accomplish a series of tasks within the same platform that almost everyone agrees are interconnected. That includes being able to:  

  • Define goals and determine the time horizon for each one.
  • Align goals with the investments best able to achieve those goals.
  • Assess and continually monitor the likelihood a client will meet their goals.
  • Track progress and performance of the investments tied to each goal. 

By not having access to a more interwoven financial planning and portfolio management system, advisors are forced to fritter away their time toggling between separate tools, something that could cost them hours each month. But more than that, these deficiencies are leading to poor service. 

The reality is that most clients don't have one goal, they have many, whether it's to buy a vacation home, to pay for a child's college education or to create more income in retirement. What's more, they typically associate different levels of priority and risk tolerance with each of them.

In an ideal world, advisors would build a series of interconnected portfolios that, individually, can focus on specific goals, but taken together, consider each client's overall objectives holistically. But this typically is not what happens, partly because many of the current patchwork set of tools fail to provide them the level of integration necessary to analyze how multiple portfolios are related to one another. It's the Achilles heel of today's offerings. 

Suppose there's another market crash that mirrors the financial crisis. Naturally, the fallout could impact not only the goals a client sets for themselves but the priority they assign to each one. At that point, an advisor needs to help them reconsider whether a shift in strategy is appropriate. 

For many, it would become a question of what's more important, the vacation home or their child's college education? However, without an advisor being able to easily determine how the pursuit of one of these goals affects a client's holistic financial plan, this sort of trade-off, and many others like them, gets far more complicated to sort out.

More advisors than ever are emphasizing goals-based planning and using behavioral finance techniques. These are promising developments for the industry, keeping investors focused on what's most important: their goals and whether they are on track to meet them. 

Yet, many of today's tech tools are not meeting this moment. Since many advisors do not have access to a more closely linked financial planning and investment management platform, they cannot shift their approach and provide their clients with the level of service they deserve. 

Dr. Andrew Aziz is the executive vice president of strategy at d1g1t, a Toronto-based enterprise wealth management platform.

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