The recent market roller-coaster ride was a shock to the system for many investors. But for practitioners of goals-based wealth management, the volatility provided reassurance and confirmation that a strategy emphasizing client goals, rather than beating market benchmarks, works under harsh conditions.
"Clients don't tend to think of themselves in terms of accounts, performance and investments, but rather in terms of their own goals, dreams and aspirations," says Zar Toolan, Wells Fargo's director of advice quality. "The industry has had to make a shift from trying to compete on pure performance to working more with clients around their individual goals. Those are the benchmarks that clients are striving for."
A goals-based advisor takes a comprehensive approach that includes market investing, wealth accumulation, drawdown, taxes, insurance, estate planning and health issues — for starters — and filters the strategy through the lens of what clients want and need.
"Clients want to know, ‘Am I going to be OK? Am I going to be able to replace my paycheck when I retire? Am I going to be able to live the dreams that I've planned for?' " Toolan says.
"That's why it's critical to focus on what's important to them. I can't spend performance, but I can spend what I've planned for my goals," he adds.
Goals-based planning is certainly nothing new in the advisory space. In fact, it could just be called good old-fashioned financial planning, as many advisors and firms refer to it in daily practice.
A whopping 89% of wealth management firms say goals-based wealth management is a major priority, while the same percentage say firms should increase spending on it, according to an October survey by the Money Management Institute and Dover Financial Research.
But one new twist is that this strategy is often reinforced by technologies, software and other tools that help define and monitor those goals, and align the goals with asset allocations.
It's also being buttressed by principles of behavioral finance that help everyone keep their eyes on the prize.
For clients, the hoped-for prize is not simply higher investment returns, but better overall outcomes and satisfaction. For advisors, the rewards may be higher referral and retention rates under a wealth management philosophy that encourages clients to give most or all of their assets to a single advisor.
"September [volatility] was a real-life stress test to the client's plan," Toolan says. At Wells Fargo, he says advisor use of the firm's recently introduced goals-planning software, called Plan to Pie, jumped by nearly 40% during the two volatile weeks from Aug. 20 to Sept. 4.
"Clients got worried, and they wanted to know, ‘What does this mean for my plan and what does it mean for my goals?' " Toolan says. The Plan to Pie app enabled advisors to quickly see — in real time — the impact of the market ups and down on client portfolios and long-term plans.
"It was a time for clients to react but not overreact," adds Toolan, who says that thorough and flexible goals planning, coupled with the firm's technology, allowed advisors to use the market volatility as a way to reposition client portfolios.
Wells advisors were able to see across their entire book of clients, not just one at a time, Toolan says.
"Rather than an advisor having to go client by client, phone call by phone call, they were able to pre-identify, in real time, in real market conditions, the clients for whom they needed to make shifts in portfolios to better align them to their goals," he explains.
"It gave them a quick and easy way to adapt to the most volatile market conditions that we had seen since 2011," Toolan notes.
As the market was selling off, Wells Fargo's investment institute felt it was a perfect time for many clients who had excess cash on the sidelines to get back into certain markets, says Bryan Piskorowski, Wells Fargo's head of advice and market strategy.
"We had tactical recommendations from the Wells Fargo institute, and we could overlay that against client accounts that were underallocated," he says.
VOLATILITY = OPPORTUNITY
Katie Nixon, chief investment officer for wealth management at Northern Trust, says that her firm's goals-driven approach also helped clients weather this year's market fluctuations. "We got no panicked calls," she says.
That's because clients fully participated in planning their risk framework according to their own stated preferences, Nixon says.
Recently she visited the firm's New York offices to demonstrate the software Northern Trust's advisors use to construct those frameworks with clients. The software allows clients to express their risk tolerance in light of their specific goals, and to make plans for how their goals and risks are likely to change over time. It puts clients in control, Nixon says, so they are more likely to fully comprehend their choices and why they made them, making it less likely they will be caught by surprise in a market downturn.
So when the slump hit late last summer, Nixon says, "We were actually getting emails that said, ‘Now I understand.'"
She adds that the month after the market tremors saw the biggest increase in new client sign ups for the firm's goals- based program since Northern Trust introduced it four years ago.
When expectations are upended during a time of market volatility, clients are likely to look to make changes. But a goals-based approach should help them make better decisions, says Riley Etheridge, Merrill Lynch's head of client segments and advisor development.
The general prescription — to stay the course — may not be correct for every client. "If they've gone from being overfunded to underfunded by a period of market stress, they might be doing the right thing by getting out of the market," Etheridge says.
"The blanket cliché that says, ‘Stay the course' is not necessarily good financial planning advice," he adds.