Is the future of portfolio management a goal-based investment strategy?

Is the future of portfolio management a goal-based investment strategy?

by Benjamin Labrousse, Strategic Research Analyst at Croesus

The shifting role of advisors

For the past decade, the wealth management industry has discussed shifting from a product-based, sales-focused wealth management environment to one centered on holistic advice and goal-focused service.

This shift has been slow going for many firms, but now multiple drivers are forcing them to pick up the pace of change:

  • Clients are demanding holistic advice
  • Emerging threats from traditional and nontraditional competitors are escalating
  • Advisors require a stronger value proposition
  • Regulatory scrutiny is on the rise
  • The industry is shifting to a goal-based advice model supported by technology

Moving the focus from risk tolerance to investment goals

For many investors, their portfolio return is just an abstract number – even when compared to a specific benchmark or to peers. They are left wondering whether or not their portfolio is doing well. This perspective leads them to focus on short-term performance and not the reason why they invested in the first place; a goal-based approach would help them focus on what really counts: whether or not their portfolio is in line with their objectives.

The current know-your-client (KYC) onboarding process evaluates clients’ risk tolerance based on annual volatility and investment knowledge. A goal-based approach allows them to focus on goals, time horizon, and life stage. Such goals are an excellent starting point for personalized advice and a sound foundation for an asset allocation strategy. Investors are not chasing a yearly average return but looking to reach a goal.

For example, if the purpose of the investment is to fund a home at retirement, clients could imagine themselves living in that home. The pleasure they’ll get from the sacrifices made today to live better in the future. They will be able to match the risk of their investments with the flexibility of the spending goal. Are they willing to take more risk in the hope of buying a larger house on the beach? Or maybe they aren’t willing to accept the possibility of living in a smaller house. By clearly defining the investment goal, the advisor is better able to identify the right amount of investment risk.

A win-win situation

Moving to goal-based investing benefits advisors as much as it does clients. It helps advisors position themselves against potential competitors. Discussions with clients are no longer focused on how their investments are performing compared to benchmarks but on how they reach goals set together with their advisor. Clients and advisors are both focused on the same long-term objective, so their behaviour won’t be impacted by market turbulence and short-term moves that could significantly affect their portfolio. Furthemore, goal-based planning helps improve the tax efficiency of strategies while focusing on each goal’s maturity.

Croesus, through its rebalancing module, allows advisors to implement these strategies and make sure clients are in line with their targets.

It will be interesting to see how financial institutions adopt this new trend, placing client goals at the heart of the relationship, rather than the product.


Experience it yourself, see the difference