The driving force behind a goal-based financial planning strategy is simple (and obvious); provide the funds for you to achieve specific goals. Specific goals include things like sufficient income in retirement, funding children’s education or buying a holiday home in Florida. They usually do not include arbitrary numbers such as a sum of money or a rate of return.
So rather than focusing on generating the highest possible portfolio return or beating the market, the strategy instead is geared towards the client getting to do the things he or she wants to.
It’s actually quite a revolutionary approach. Why? Because the way that the financial industry has traditionally worked is that someone has a product to sell and goes about trying to make that product fit your needs. If you’ve ever sat through an investment meeting arranged by your bank, you’ll know exactly what I’m talking about. Starting with your actual goals turns the whole thing on its head.
That’s also the reason it isn’t a huge thing. It’s not in the interests of the financial services industry that the client’s needs be at the centre of the strategy. What if the best course of action for the client is to actually divest themselves of most or all of their financial products? Shock! Horror! That would mean no commissions or fees.
Must-haves and nice-to-haves
Here at The Money Advisers, we look at the clients’ short-, medium- and long-term goals. Then we further analyse those goals in terms of which are necessary and which are desirable. So, while it may be desirable for you to have an income on retirement of €55,000 pa, it is necessary for you to have €30,000 pa to meet all your outgoings and have a comfortable lifestyle.
We look at how far away you are from needing the funds to do whatever it is you want and we figure out how much risk you can afford. At all times we make sure that your objectives – your must-haves – are fulfilled. We would never suggest you risk everything – sometimes our jobs as financial planners involve tempering your greed.
Think about the advice you got
So, you may have invested in property during the boom. What need did that fulfil? Was that going to be an asset that would appreciate in value so that you could sell it in ten years to fund the twins through pilot school? If your timing was right, you may have achieved your objective. But if you bought in 2006, your twins may have to change their plans.
Who advised you on purchasing that property and how rigorous were they about making sure that it would meet your objectives? I can’t imagine the property developer, the lender or the estate agent dissuading you from buying property at the peak of the house price bubble. They had vested interests so it didn’t make sense for them to suggest there might be better ways to pay for your children’s third level training. A friendly word of caution: ignore the noise.
Remember: if it doesn’t look like what is being suggested will fulfill your objectives, you are being sold to, not advised.
Setting goals gives focus
There are other advantages of the approach for the client; by pin-pointing goals, you will be automatically more likely to achieve them, giving you a greater feeling of control over your finances and life. Secondly, with those goals clearly in the crosshairs, you’ll be less likely to act impulsively based on a fad or scare and get off track. Of course if you do get the jitters we’ll be there to keep you on the straight and narrow.
Goal-based investment strategies are founded on what you want to achieve with your money and when. They take into account how comfortable you are with risk and how much risk you can realistically take on. It’s an approach that takes the fear out of investing.
We measure our success not on the average rate of return of investment portfolios we arrange, but on how many of their goals our clients realise. Yes, its’ a bit different.
As you know, I’m not one for the next big thing, but goal-based investment should be bigger than the Internet. Because of the way the financial services industry works, it probably won’t.