Goals-Based Wealth Management

Imagine paying a visit to your tailor and ordering a suit.  Your only instructions:  It has to be bigger than your co-worker’s suit.

That’s a ludicrous scenario, of course.  Everyone understands that the right-sized suit for you is the right-sized suit for you. But this short-sighted approach ‒ fixating on one-upping someone else ‒ is exactly how most people invest their money.

American investment managers, investors themselves, and most financial advisors, obsess over beating the S&P 500, or the Barclay’s Aggregate Bond Index, or any of countless other market benchmarks.  In reality, the only truly important benchmark is our personal goals.

This is the insight that underlies the growing popularity of goals-based wealth management.  Rather than using investment performance versus the market as its key success measure, a goals-based approach focuses on thoughtfully translating your wealth into the life you want.

Goals-based wealth management has been practiced at Intelligent Capitalworks and other investment advisory boutiques for many years.  Now, big industry players such as Merrill Lynch are reportedly jumping aboard.  The common sense essence of goals-based investing includes:

  • Identifying long-term goals.
  • Determining the funding requirements and timeframe for those goals.
  • Designing an investment portfolio to achieve the goals while taking the least possible risk.
  • Evaluating investments by progress toward goals rather than versus market benchmarks.

That’s a very different, and much healthier alternative to the decades-long Wall Street sales pitch of “having your account managed just like their institutional accounts.”   By changing the “horse-race” mentality, goals-based investing can help you not only achieve your goals but do better in the market as well.

Until now, too many investors have taken unnecessary risks in the pursuit of arbitrary returns.  Too often, those investors have panicked in turbulent markets.  Knee-jerk behavior such as buying and selling at the wrong times hurts investment returns and can push objectives such as a comfortable retirement further away in time.

Indeed, over the 20 years ended December 31, 1013, the typical equity-fund investor has earned 4.2% less than the S&P 500, according to research firm Dalbar.  The average fixed-income fund investor earned an average of .71% per year over the same 20-year period, well below even the rate of inflation.

Goals-based investing broadens investors’ perspective and refocuses them away from the day-to-day performance of market benchmarks.  This greatly helps to reduce temptation to continually buy and sell investments, which helps improve the odds of investment success.

Beating indexes isn’t the only distraction for investors, by the way:  There is also too much focus on the “active vs. passive” debate.  This too is beside the point.  When we understand that successful investing means achieving carefully thought-out goals, we can thoughtfully choose active or passive strategies ‒ or a combination of both ‒ that are most likely to help us reach our goals within our timeframe and with as little risk as possible.

It’s no accident that goals-based wealth management has gained traction in the wake of the financial crisis.  That upheaval caused investors to reflect on what really constitutes success.  Increasingly, the narrow pursuit of beating benchmarks is giving way to an emphasis on what really matters:  Reaching life’s most important financial goals. Contact us if you would like help developing a goals-based investment strategy. That’s just part of what we do.