An approach to achieve life goals, not (only) to build a risk-profiled portfolio
Financial planning is a method which aims at helping clients save for multiple financial objectives across various time horizons.
The process involves defining an individual’s or family’s goals, prioritizing them and determining the optimal way to fund them — taking into account all assets, both tangible and non-tangible (property, inheritance, business…) and how they affect each other.
It provides the advisor and client with greater flexibility to adjust for fluctuations in life as well as financial markets.
Goals-based Financial Planning (GBFP) is increasingly present in the wealth management offering, essentially in the U.S. where the market is estimated at more than $5tr AuM at the end of 2017 [1].
Compared to so-called traditional "financial planning", which is mainly used by robo-advisors, GBFP goes further in the analysis of the client’s individual situation, in the definition of goals, proposed solutions and plan monitoring:
- Beyond the inclusion of all assets, the analysis of the financial situation takes into account current and forecast liabilities and expenses, life stage and income needs.
- Goals are time-sequenced (short, medium, long term) and graded (essential, important, aspirational) in order to determine the level of risk which could be taken for each of them and to consider the potential “failure to reach” one of them.
- The solutions assess risk capacity of each goal – considering the time remaining – and include a wide range of investments (financial investment, alternative assets, variable annuities…), tax & fee optimization, protection against unexpected circumstances (life insurance, disability, guaranteed income…) and a withdrawal & decumulation strategy.
- The plan is continuously monitored to evaluate the strategy, ensure the scenario is “on track” and adapt the allocation as the goal's end date approaches. In case of unexpected events or change of goal, the plan could be reviewed.
Go further with our study to see the differences between traditional (digital) advice and goals-based planning.
A required hybrid approach
Providing a holistic pure automated advice solution is currently difficult because providing chargeable recommendations requires to comply with complex regulations (especially for tax and inheritance). Moreover, the shorter attention span of most people in a digital environment limits the number of detailed questions which need to be asked for a complete thorough analysis. At last, the level of services, the solutions and the acquisition costs are incompatible with an online-only low fees model.
GBFP is consequently aimed at HNWI (High Net Worth Individuals), with generally a high level of minimum investment ($50k on average). Thus, it is increasingly proposed by wealth managers (Fidelity), asset managers (Vanguard) or independent robo-advisor (Wealthsimple) as an extended service of a traditional online financial advisory.
Besides, human advisors are in favor of including digital tools in their offer as they help them to save time, improve customer journey, reach younger clients, enhance services and advice. The Tech Survey 2017, conducted by Financial Planning, indicates that financial planning software (MoneyGuidePro, eMoney) is used by 85% of advisors while 18% of them are using robo-advisor [2]. Fidelity Investment built on this need of a specialized tool to team up with eMoney by integrating its B2B tool (enterprise data collection, modelling & rebalancing, business development analytics) into a RIAs & BDs' [3] leading financial planning software.
A win-win solution for both investors and advisors
According to research conducted by Morningstar [4], GBFP creates a potential extra return for investors, called “gamma”. The analysis indicates that using goals-based framework can lead to an increase in utility-adjusted wealth of 15% versus a naive strategy. This is equivalent to generating an annual gamma of 1.65% for the lifetime for the base scenario (and even 1.8% according to a recent update).
Moreover, GBFP enhances client’s financial understanding and satisfaction. People with financial plans feel they are saving more, living well, and experiencing higher levels of overall contentment in their lives [5].
On the advisors side, GBFP allows to build a long-term relationship with clients. By focusing the attention on the definition and the achievement of goals – rather than performance and its comparison with various market benchmarks – advisors can face off low fees automated advisory. The result is not only the attrition decrease but the rise in investments (Morningstar research estimates that financial planning can add 2% AuM per year).
Main “hybrid” actors
Wealth managers are naturally strongly present in this service but asset managers and robo-advisory pure players have also taken strong positions. Yet, they don't offer the same level of service and asset allocation capabilities. Here are a few examples:
Wealth Managers:
- Morgan Stanley: A comprehensive range of solutions, including insurance & philanthropy services, trust, estate & legacy planning. Online and mobile tools, with intuitive graphic interface. See website.
- Fidelity: 5 levels of services, from robo-advisory 'Fidelity Go' to traditional wealth management. Multiple goals strategies, timely alerts and updates on the status of investments. A suite of calculators and tools, notably 'Fidelity Retirement Score' an 'Planning & Guidance Center', to create or revise the plan or investment strategy and explore the potential impact of certain changes. See website.
Asset Managers:
- Vanguard (Personal Advisor Services): Solutions focused on financial assets (no insurance or legacy), including REITs. Access to a dedicated Certified Financial Planner™ to build and adjust customized plan. Online and mobile tools, with intuitive graphic interface. See website
- Charles Schwab: Financial plan with guidance from a Planning Consultant who is a Certified Financial Planner™ professional. Goal Tracker, to monitor if the savings/income goal is on/off target (with Schwab Intelligent Portfolios). ETF investments only. No retirement planning tool. See website
Online platforms:
- Personal Capital: Advanced retirement planner which takes into account anticipation of large expenses / income events and graphic visualization. Customizable asset allocations (models) from $200k investable assets. Private banking services over $1m. See website.
- Wealthfront: Online & automated services only (tablet & mobile phone). No advisor. Dedicated plan & investment for retirement, home & college. AI-based solutions (dividend reinvestment, daily tax-loss harvesting, financial account analysis to figure out spending & savings patterns). See website – See Path® blog.
Author: Pascal Buisson - June 2018
[1] Securities and Exchange Commission (SEC) - [2] www.financial-planning.com/news/mobile-ai-and-microinvesting-tech-survey-2018 - [3] Registered Investment Advisor & Broker-Dealer - [4] Alpha, Beta, and Now…Gamma (David Blanchett & Morningstar - 2013) - [5] Canadian study – FPSC (2012)
