Goals-based investing suggested as replacement to advisers’ traditional approach

 In Estate Planning, Investments, Retirement Income

A new concept is sweeping the global investment community. It’s called goals-based portfolio management. The concept, which applies to the average investor, was discussed at a conference held in April this year at Princeton University, attended by investment professionals and almost 150 academics from around the world. The impact of this concept was evident in a quote from a conference organizer, Finance Professor Lionel Martellini, who heads EDHEC-Risk Institute. He called goal-based investing a “revolution” in financial advising. Here are some of my interpretations of that “revolution” that I gleaned from the conference.

Personal investing is more complex than institutional investing

Overall, two types of investors exist, The extremely wealthy and ordinary investors such as us.

Private wealth advisers clearly handle complex personal portfolios. They are called upon to deal with a variety of targets, family relationships, varying income sources, and other situations in portfolios. Institutional managers sometimes regard themselves as more sophisticated advisers due to the nature of the investments they manage, suggested Princeton Professor John Mulvey. But these investing principles are not necessarily applicable to retail investors, he added.

Because the wealthy have sufficient capital to meet their essential as well as their aspirational goals, investing for them is about increasing the value of their assets, not about meeting goals. They are generally long-term investors concerned largely only about capital growth. In a similar approach to that taken by the financial managers of trusts and foundations, their advisers regard diversification as their main risk management tool, as well as the application of the principles of modern portfolio theory.

Because they have time to regain any losses they might incur, all these investors need to worry about is rebalancing from time to time. The major objectives zero in on accumulating wealth over time and maximizing risk-adjusted return.

But only a relatively small number of investors are that wealthy. Most average investors can attain their essential goals, including retirement savings, or aspirational goals — such as owning a vacation home — only over time. This means combining current savings and future savings with growth and income from investments.

One way to look at these goals is to see them as liabilities, says Associate Professor Woo Chang Kim, who heads the Korea Advanced Institute of Science and Technology’s Center for Wealth Management. As a result, advisers should see their methods as asset-liability management rather than the application of the principles of modern portfolio theory.
Saving sufficient money to meet these goals, or liabilities, over time is a challenge for these investors. Advisers, therefore, need to emphasize goals rather than the growth of existing capital.

The problem’s source

A problem is that many advisers manage their average clients’ portfolios as though their clients were from the extremely wealthy group of investors. Clearly, an approach that is goals based would be more suitable.

The traditional approach to individual financial planning sprang out of the method developed for estates and foundations more than 100 years ago, Kim explained. The main aim was to grow the capital with long-term investments, while at the same time generating sufficient income for yearly spending requirements. For decades, the money was invested in fixed-income vehicles that supported an income of 4 percent to 5 percent a year. This strategy remains true today for those who run endowments, many of whom invest a large majority of their holdings in diversified equity and alternative funds. But such an approach is viable for only about 1 percent of individual investors, that is those who are extremely wealthy.

How to apply goals-based investing

Some suggest that portfolios that are based on goals are comprised of similar elements to those as investing for the wealthy. The only difference is in the way they are presented, they argue. This is true only if assets are not matched to liabilities, however. If the same strategies are applied as in a fixed mix of assets, the returns are likely to be similar. But average investors will be more receptive to a planning approach that addresses essential and aspirational goals even though the strategy might be less effective.

Five goals are shown in an example of a $1 million portfolio (see Table 1). These are depicted as being either essential or aspirational. Here, the main goal is to have two years of costs ($120,000) invested to support an elderly parent, such as a mother who might be dependent. The second priority is saving for college tuition ($130,000). One way to look at these costs is to create two separate portfolios, one for safety and another for growth.

apply goals-based investing

Sample discussion

Let us assume that stocks fall sharply. A client arrives for a portfolio review. Here are two sample conversations, based on the traditional approach compared with an approach that is based on goals.

“The market fell 10 percent over the last quarter. Your portfolio, on the other hand, fell only 6 percent. When looked at over the last three years, your portfolio has grown at a yearly rate of 5.3 percent. The benchmark rate is 4.7 percent.”
The adviser’s conclusion: The performance is good.
The client’s view: Will I be able to reach my goals?

Goals based
“Your savings now cover two years of care for your elderly mother (meaning that she is unlikely to have to take up residence with you one day). In addition, the costs to send Sarah to Harvard Business School are covered.”
The adviser’s conclusion: The client’s main goals are covered by the portfolio.
The client’s view: I’m pleased my costs will be met!


To achieve something in life, you will need to identify important life goals, create a plan of action, and possibly even consider questions of personal identity. Goal achievement involves clarity of purpose, persistent determination, and a reward system that keeps you on your intended path. Most importantly, it requires a goal that keeps you inspired. Contact us at your earliest convenience to achieve your goals.

Recent Posts

Leave a Comment

Tax Proposal