What is Goals Based Advice?
Goals based advice is not a new phenomenon. Financial planners have been relating advice back to client’s goals and objectives for many years. There are however, two sides to this story. Consumers see it a little differently. Based on extensive research and outcomes of the Royal Commission, they feel in many cases, goals are linked closely to product sales and that financial planning is largely focused on products, not them.
This is an unfortunate perception, as financial advice should be both strategic and tactical in nature. If some clients feel this way, we have a lot of work to do to re-establish trust in the financial advice process.
The solution is to shift focus. We must anchor a client’s goals at the heart of the advice process, as well as begin to adopt a view that products may or may not be utilised in the advice process.
To evolve to a client-centric approach to financial advice, let's unpack the multiple layers of Goals Based Advice through the lens of a consumer…
1. Goal Conversations - the conversations that draw out the client’s goals, dreams, values and aspirations.
2. Goals-Based Advice - the technology and modelling that sits behind the outcome. It explores what-ifs, trade-offs, setting and tracking clients’ goals. It utilises strategies to improve achievability and empowers clients to focus on what they can control.
3. Goals-Based Investing - the “goal/risk tolerance” methodology allows individual goals to have their own risk tolerance and investment asset allocation rather than the traditional “one-size fits all” approach.
1. The Goals Conversation
It all starts with the client’s goal conversation. Did you know that 70% of people don’t actually know what their goals are? 25% of people do have goals, but don’t have them written down and only 5% have them committed on paper. Coming up with the client’s financial goals is not a natural or fluid process for many advisers or their clients. The process of helping clients express their goals is a skill that advisers should continually work to improve.
When goal conversations are well conducted, it ensures clients maintain focus on their individually expressed outcomes and not on outperforming the share market.
Often, advice neglects many short-term goals. While long-term goals are important, consumers struggle to engage with them emotionally. An advice process that dually focuses on long and short-term goals will have greater emotional engagement for the client, as well as yielding better financial outcomes.
Having conversations with your clients aimed at expanding on and understanding their dreams, aspirations or “bucket list” experience is the first step. It encourages them to think of goals without the parameters of “reality” stifling the ideas before they can be modelled.
Emotionally, we should take this step slowly and ensure the client’s goals are directed. Understanding what drives those individual aspirations and the fluid prioritisation of goals can see the client modifying them before agreeing on the outcome.
As a result of these discussions, advisers get to know their clients on a deeper emotional level. They can also advance some of these goals in the timeline to model their achievability and set an appropriate plan to achieve them.
Take a deeper dive into the psychological and human behavioural aspects of Goals-based conversations by reading Chapter 2 “The Behavioural Science of Goals Based Advice” whitepaper.
2. Goals-Based Advice
Your role as a financial planner is to ensure that your client’s assets and income meets their changing expenses over time and throughout different life-stages. The strategies and systems you implement help them to meet their life goals.
This brings us to our second point, the technology and modelling that is used to bridge the gap from where the client is now, to where they want to be in their future. It is aligned directly to the attainment of their financial goals. These goals are then set and tracked over time.
The Goals Based Advice process begins by co-creating it with your clients. By using interactive financial planning tools, you can test different scenarios with clients in real-time. By using tools such as; stress tests, trade-offs, what if's and strategies, you can immediately illustrate the impact of different decisions to their goal achievability.
Once you have identified the most optimal scenario, this becomes the recommendation for their advice. An instant online SoA is then generated and their personalised, interactive financial plan is delivered to the client’s own app. This is now ready to track with live data.
You’ve now just empowered your clients to focus on what they can control and set small milestones along their financial life journey.
These small milestones are essential from an emotional, psychological, biological and behavioural point of view.
Tracking and optimising the client’s goals is where goals-based advice truly comes to life. It is the difference between transactional financial advice and relationship-based advice.
3. Goals-Based Investing
The next step of goals based advice introduces financial products into the mix. It explores how assets can be invested to focus on the individuals goal attainment as a measure, not just utilising market benchmarks.
A goals-based asset allocation is a different way of approaching asset allocation. This method is more pertinent to the client's individual goals and gives them greater ownership in the outcome. Essentially, they co-create the investment outcomes and expectations.
Rather than putting the clients whole of wealth into one bucket, you now have the flexibility to tailor their investments to their life goals and establish multiple, segmented, wealth buckets.
As an example, your client has 2 goals. Goal 1 is to buy a nice boat, and Goal 2 is to retire with dignity. Goal 1 may have returned a high-growth risk tolerance and Goal 2 a conservative risk tolerance. In traditional investment advice, the client is only allowed one risk tolerance that is applied to both of these goals.
With goals-based investing, you can allocate different risk tolerances to each of these goals. Goal 1 is linked to a high-growth asset allocation and Goal 2 to a conservative super asset allocation. We can link those two investment accounts to each goal to track their achievability. The client portfolio review conversation becomes focused on goal achievability rather than market performance.
This makes investment advice far more engaging and personally relevant to the attainment of your client’s goals and objectives.
Take a deeper dive into the investment aspect of Goals-based investing by reading Chapter 3 “Goals based customer experience & multi-dimensional modelling” whitepaper.