A panel of industry experts discussed the growing trend of goals-based investing at the Family Wealth Report Summit last October.

The very definition of goals-based investing came under fire from panelists at Family Wealth Report’s October 2014 Summit, with speakers debating its methodologies and best-practice, as well as how one defines success and what constitutes a “goal.”

Speaking on the panel, entitled “Goals-Based Investing: Tackling The Holistic Approach,” were: Jennifer Dempsey Fox, senior vice president and managing director of wealth strategy at Hawthorn PNC Family Wealth; Daniel Goldstein, senior managing director at Manchester Capital Management; Jeffrey Mortimer, director of investment strategy at BNY Mellon Wealth Management; and Chuck Stutenroth, regional managing director of Ascent Private Capital Management.

Peter Langas, managing director and head of investment strategies at Bessemer Trust, chaired the panel. The panel’s session sponsor was BNY Mellon Wealth Management while Hawthorn PNC Family Wealth, Bessemer Trust and Ascent Capital Management were panel contributors.

The nuances of goals-based investing

The industry's intensified focus on goals-based investing signals a shift away from a heavy emphasis on benchmarks towards client objectives, Mortimer said. The concept entered the limelight following the market crash of 2008-09, when investors saw the results of the wrong decisions they made with regards to their asset allocation, he added.

“We found that bifurcating client portfolios seemed to make sense, and agreeing with clients that we would manage a portion of their portfolio with income and capital preservation being of the first order gave them peace of mind during market downturns,” Mortimer said. “Of course we were managing the whole portfolio with both growth and income in mind but even this mental compartmentalization seemed to help clients immensely.”

Dempsey-Fox explained how, to help clients differentiate between goals-based investing and traditional investment management, advisors should help them identify their objectives, develop solutions for these, and break down their portfolios accordingly.

“I see the distinguishing factor as what you are starting with the client – as long as you’re starting with understanding their goals and objectives, and identifying solutions that they’ve determined meet those needs, you’re having the type of conversation that’s very different than a traditional investment advisor. And, not to disparage anyone, but when you are only focused on the portfolio that you’re managing, it’s really hard to have comprehensive conversations around goals,” she said.

However, Goldstein suggested that the term “goals-based investing” is somewhat a tautology, as all investment activities are geared towards a goal.

“If you’re talking about a shift in Millennials wanting to add another goal which is beyond the financial (such as philanthropy)…and you can deploy your capital in a different way to have a different impact, then I see some sense in talking about these other goals. Otherwise, I don’t really get the conversation when speaking about UHNW investors,” he said.

Dempsey-Fox argued that goals-based investing should be seen as an evolution of the wealth management industry in a positive direction to benefit clients through the services it provides.

“Clearly there’s a disconnect between what we think we’re telling clients and what clients are hearing, and so if goals-based investing is a way to better align and facilitate a planning conversation with our clients, I’m all for that,” she said.

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Converting and keeping clients

Convincing clients to switch their focus away from chasing benchmarks can be a challenge, and Stutenroth suggested a two-prong method to combat this. Firstly, he pointed to academic research.

“The past 20-25 years of academic research makes a powerful argument that over a long period of time it’s very difficult for professional managers to out-perform an index,” he said. Secondly, advisors should remind their clients of watershed events such as the 2008 financial crash, where the subsequent peaks and troughs in equities predominantly underperformed benchmarks.

For constructing a client's portfolio, Mortimer spoke about BNY Mellon’s proprietary system software that combined clients’ goals from their questionnaires with the firm’s investment strategy.

“By identifying those objectives through analysis and showing the client in advance what the portfolio is going to look and act like, you have a great chance of keeping them on that rollercoaster ride of the market. As much systematization and rigor you can put on the front end, the more apt you are to keep the client over the long term,” he said.

Retaining clients and holding their interest can be aided by goals other than investing, Goldstein argued. When conducting family meetings, he said families typically don’t care about investments as much when they are doing well. Instead, “goals are much more dynamic, organic and complex with families” and become a more interesting way of purveying information, as well as educating family members with limited financial literacy.

Langas noted that when investments are performing well, advisors should use this as an opportunity to remind clients of the risk in their portfolios. “A lot of what GBI is about is trying to keep people on track through the thick and thin, and trying to focus on that long-term goal – not just the fact that in the short-term we’re having a rough time in the markets, because that’s just the nature of investing,” he said.

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Client onboarding

Incorporating financial goals into a portfolio takes more than tools such as questionnaires and Monte Carlo simulations, BNY Mellon’s Mortimer asserted. He explained how, when prospecting for wealthy clients, staff from across the company - from balance sheet staff to liability specialists - are drawn in to purposefully construct a portfolio.

Stutenroth added that onboarding clients from a goals-based investment perspective can be more complex for advisors to fully capture a holistic view. The key, he said, is eliciting conversations using tools such as questionnaires to generate an overarching view on matters such as multiple generations, business ownership and philanthropic goals.

“It’s very difficult to systematize that approach because every engagement is unique and has a different set of requirements and complexities,” he said.  “We plug-and-play as necessary in order to identify and tailor that approach to that unique circumstance that family may be wrestling with.”

Significantly, he said information garnered during the onboarding process should not be stored and then forgotten, citing it more as an “evolution” to learn, experience and institutionalize the topics brought up.

The panel’s chair, Peter Langas of Bessemer, suggested that, to onboard clients, the initial questions advisors ask need to change.

“The mindset and question upfront when you have people who come into a large sum of wealth is ‘what are you going to invest it in’…but really you should take a step back and ask ‘what are you trying to accomplish with the money’,” he said.

For example, advisors could identify different “buckets” to place assets into based on clients’ spending needs and goals, and then assign an individualized risk profile to each of these buckets.

“As you start doing the analytics behind that to show how much money one needs to set aside to achieve that spending goal, and then how much money is left over, it becomes a very different conversation because that portfolio is going to meet your spending goal over the long term and so may be structured very differently,” he said. For example, by conservatively managing money you can get surplus capital, which you can then use for other goals such as philanthropy.

Likewise, Ascent’s Stutenroth added that this excess capital can be used to help achieve social goals by investing in philanthropic causes and foundations, providing an investment opportunity with a 50-year time horizon where families can make an impact with their wealth that “may far exceed what they’ve spent in their lifetime.”

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Combining social and goals-based investing

With different clients seeking a range of different goals, Manchester Capital Management’s Daniel Goldstein discussed the place for social and impact investing within a client’s portfolio - and particularly the levels of financial return available.

While grants and donations have no financial return on capital, other investment methods can provide below-market to market returns – such as venture philanthropy, social entrepreneurship and social investment funds. At the other end of the spectrum, socially-responsible and impact investments not only have the potential to provide above-market returns, but also don’t add any risk to a client's portfolio, he said.

“A lot of this is pure marketing and you need to choose where you are in the spectrum as you discuss these different strategies. There’s a lot of need for venture philanthropy, but as you get further down the spectrum you draw a dotted line of what would really be considered investment-grade with the rigors of investment analysis and strategic portfolio construction, and that’s going to be your market and above-market investment,” he said.

However, as goals-based investing should not necessarily revolve around attempting to beat a benchmark, Goldstein explained the various measures of success clients can gauge. Some investors may want to invest in oil firms to engage management and change business practices, whereas this may seem unsavory to other investors. Without understanding objectives, advisors won’t have the metrics available to measure if these have been achieved, he said.

Millennials

Social and philanthropic investments are often more popular among the next generation of advisors, both Goldstein and Dempsey-Fox said.

“To have 2008 as a major life event, as well as a market event, has a tremendous impact on the outlook of the Millennials as we go forward and how to manage portfolios,” Dempsey-Fox said.

Among Hawthorn’s Millennials, she has found that these clients see their wealth as a tool they can use to make a difference for themselves and those around them and have been disillusioned by the concept of beating market return. In particular, she pointed out how education is an integral part of the wealth transfer process between generations and Millennials’ parents’ investment outlook. She discussed how several first-generation wealth creator clients in particular are uncomfortable discussing purpose-driven techniques as they are still focused on wealth creation.

Client reporting

Mortimer stressed the importance of reporting the progress of goals to clients by breaking them down individually as well as aggregated together.

“[Reporting] is going to evolve, we’re finding ways to do this is an efficient manner, but in as far as best practices in general [for client meetings], immediately a lot of people want to go to the line items and see what each piece did. But to bring it more to this goals-based approach, your first part of discussion should just be the bottom line. Where are your assets, what do you start with, where are you today, and what’s been the bottom line return for those assets. Then if you need to go into more detail about ‘how did your large-cap US equities do’ and ‘how did your non-US equities and your bonds do’ and what have you, that may be a discussion,” Langas, who chaired the panel, said.