Goal based advice increases in popularity

Regulatory changes are providing advisers with an opportunity to re-set clients’ investment portfolios towards a goals-based approach.

Thursday, February 24th 2011, 7:36AM 13 Comments

by Benn Bathgate

NZ Funds Management has reported a shift in its clients towards goal-based advice and believes this is a trend that is set to continue as advisers, prompted by new regulations, re-document their clients' investment plans.

The company said goals-based advice has more than doubled for clients of advisers using their investment portfolios, with clients with assets of $31 million shifting from traditionally structured portfolios to those built around client goals in the last quarter to December 31.

"Our expectation is that over time, the majority of clients in New Zealand - individuals, families and family trusts, will, with the assistance of advisers move to some form of goal based advice and investment - away from the disappointment of traditional approaches," said NZ Funds principal Glenn Wright.

Unlike traditional portfolio approaches, described by Wright as driven by a pension fund type mentality where a single diversified portfolio is constructed with performance measured against market benchmarks, a goals based approach links peoples' individual finance goals to several separate investment portfolios.

"A goal based approach essentially applies the principles and insights gained from research in the field of behavioural finance by taking into account how people, their money, and their behaviour intersect as their assets and lives change throughout life," Wright said.

Okke Hansen, director and partner at Resource Financial Planning, is one adviser who has revisited his clients' portfolios using a goals-based advice process.

"I want to build on the values based discovery process we have used successfully with clients," he said.

"The key for me is to apply risk management and downside protection across all of our clients' portfolios.

"The combination of a searching discussion with clients about their goals and needs, and implementing several discrete portfolios as a result of these discussions, each with a ‘client purpose' appeals to the individuals and families that we work with."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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Comments from our readers

On 24 February 2011 at 8:48 am Keith Walter said:

Surely that's the way all advisers have been operating for years!

On 24 February 2011 at 12:15 pm Zodiac said:

Ahh, listening to the client and giving them what they want. What a novel approach. Do you think it might catch on ?

On 24 February 2011 at 1:47 pm traveller said:

I found the comments of Glenn Wright and Okke Hansen largely unintelligable. As Keith Walter said,: So what's new?

On 24 February 2011 at 3:07 pm albert k said:

If this article is a reflection of current practices of financial / investment / insurance advisors, then no wonder the rush into this new financial services regulation.
Needs analysis, which of course includes goal setting (just in case some are still not aware), has been around since at least the 1980s.
I am now unsure if I am moving forward or backwards in this industry with people in the same biz telling me things that had been in practice for at least the last 30yrs.

On 24 February 2011 at 7:33 pm Independent Observer said:

If this is a revelation, then the industry is in dire straits.

On 25 February 2011 at 9:08 am me too! said:

Just adding my vote to the 'so what's new?" camp!

On 25 February 2011 at 2:33 pm Richard James - NZ Funds said:

I can only conclude from the comments that our message here was not well conveyed.

What we are tallking about is the shift our advisory clients are making toward liability driven investing for individuals allied to portfolio construction with a behavioural finance overlay. In other words, true wealth management.

We are applying detailed goal definition, quantification and scheduling processes along with scenario planning to accurately and realistically match individual's current and future assets to their future liabilities and then structuring their wealth into a series of discrete portfolios each purpose built to meet those discretely defined goals.

From my experience, there are very, very few advisers in New Zealand who are conducting such a process with any real coherency between the advice process and the management of the portfolio.

If you would like to read a little more about the philosophical underpinnings go to http://www.nzfunds.co.nz/docs/behaviouralfinance.pdf

On 25 February 2011 at 2:55 pm Glenn Wright (the author) said:

Hi (from the author of the article)
I’m glad that the article has engendered some interesting and curious responses.

If you would like to read in more detail about goals based advice and goals based investing, there is an extensive paper on our website at

http://www.nzfunds.co.nz/docs/behaviouralfinance.pdf

which sets out the insights from behavioural finance which have led to the construction of a series of compartmentalised goal based portfolios for clients.

If you would like to compare your own goals based methodology to that which we have developed – from plan writing software, investment portfolio construction, to goal based review material, give me a call on 09 3772277, or email me at glennw@nzfunds.co.nz.

Happy to talk with you over the phone, or meet with you to discuss the development and implementation of this advice and investing methodology.

Glenn Wright

On 25 February 2011 at 4:46 pm Independent Observer said:

Thanks Richard & Glenn for clearing this up

My response remains: If this is a revelation, then the industry is in dire straits

On 25 February 2011 at 7:08 pm Forthright said:

In my experience advisers have not been developing client centric portfolios for years. In fact we have been deluded for years into thinking investment committees pontificating on what funds should be included in an investor’s portfolios is still a viable proposition going forward into a regulated environment. The client doesn’t care about direct, index, active, absolute return, core, passive or any other fancy named portfolio tilt. Advisers have been for years been building product centric portfolios, more concerned about how many top quartile shares, bonds or managers are included in the portfolio.

If another GFC occurred tomorrow, the majority of Adviser built portfolios would do just the same as they did during the last GFC. Ask yourself, whether your clients could stand another GFC, then ask yourself what you are doing to make sure your clients don’t suffer the same results from a GFC in the future.

On 28 February 2011 at 11:46 am traveller said:

I've just read the article. In it, it is suggested that each client has a series of portfolios to cover immediate, short term, long term and growth assets, thus ring-fencing each objective. But markets ebb and flow and surely there will be a need to regularly switch assets from one portfolio to another, eg if short term rates or bond yields rise or fall, ditto dividend yields, share prices or the currency. I don't see why this can't be done within a single portfolio. How would the system cope with the fall in T/D rates from 8% to 3% when the stock market is steaming ahead? And isn't "Total return" an important consideration? Has research been done to support the idea of separate portfolios?

On 28 February 2011 at 2:51 pm Anon2 said:

Oh dear! Looks like the small fry advisers who think they know what they are doing (of which there are a lot) are trying to argue against people that clearly do know what they are doing. Its an argument smart people never win.

On 2 March 2011 at 10:31 am LPL said:

Reply to Anon2 ...
Perhaps you should read 'The Emperor's New Clothes'.

Having read the paper 'Behavioural Finance Theory' the key point is ... "Behavioural theory shows, however, that investors exhibit more than one risk attitude, associating different risk levels with different types of goals."

And, NZ Funds belief that there is a need to move from the one pot mentality (that they previously held for clients) to the many pot mentality.

I recall the many pot approach being taught - so no this is nothing new. Having said that, there is nothing wrong with a recap from time to time.

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Goal based advice increases in popularity

Regulatory changes are providing advisers with an opportunity to re-set clients’ investment portfolios towards a goals-based approach.

Thursday, February 24th 2011, 7:36AM 13 Comments

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