Investment advisors have a challenging task. Clients expect advisors to create financial strategies that will help them achieve their goals. However, delivering the desired outcomes is dependent on factors mostly outside of the advisor’s control.

The success of the strategy is influenced by the behaviour of the client, whether investment markets will be favourable, and whether the asset managers they recommended made the right calls. The uncertainty of the investment outcome places tension on the advisor/client relationship and often leads to a breakdown in trust.

Trust is critical for building a flourishing financial advice business. It is also an important element in improving investor behaviour. Research by Vanguard has shown that trust is the key determinant in the motivation and decision making of clients when it comes to selecting a financial advisor and staying with an advisor.

The wealth management offering of the advisor and the investment solutions implemented are key ingredients in establishing and maintaining a trusted relationship with the client.

This raises two important questions:

  • Is your wealth management offering instilling trust?
  • Are your investment solutions building trust?

Wealth management that meets expectations

The Vanguard study found that trust consist of a functional, emotional and an ethical element. Functional trust is important at the beginning of a relationship. It is established when the advisor shows competence and when a client centric advice process is followed.

However, the research found that the most important element in building and maintaining a trusted relationship is emotional trust. Emotional trust exists when a client feels engaged throughout the wealth management journey. Engagement results from a wealth management process that is personal - when it relates to how it enables the client to achieve their life goals - and when both the financial and service outcomes meet their expectations.

This is where a written goals-based wealth plan can help to instil trust. A personalised goals-based wealth plan engages the client emotionally throughout the wealth management journey because it relates to how the recommended financial strategies will help them achieve their personal life goals instead of pursuing generic financial goals. It changes the focus from the money to what the money is for. This keeps the client motivated and increases the probability that the client will stick with the strategy through market cycles.

By prioritising the client’s goals in terms of importance, clearly defining the expected outcomes, and determining each goals risk capacity, different investment strategies can be implemented that integrates investor behaviour and traditional investment principles. This in turn creates context for the client to understand why a specific investment strategy is appropriate for the specific goal and how it will increase the probability of achieving the goal.

This approach creates goal specific benchmarks which helps the client to measure success in terms of each goal instead of having a single portfolio as a reference point. Multiple portfolios that are aligned with each goal’s specification reduces the risk of behavioural biases derailing the investment strategy during the investment term.

It also helps to define how success will be measured for each goal which reduces the risk of not meeting the client’s expectations and helps to maintain emotional trust.

The need for investment solutions that reduces uncertainty

A goals-based wealth management approach requires investment strategies that are aligned with the criteria private investors use to evaluate investment success and risk.

Private investors do not usually look at investment outcomes in terms of a target like inflation plus a percentage. When they have a specific goal, they evaluate the success of the investment in terms of its ability to deliver the capital they need to finance the goal.

It is also rare to find private investors expressing risk in terms of volatility or standard deviation. They look at risk in terms of the chance that the investment will not deliver the required outcome at the time when they need it and in terms of the risk of losing capital.

Private investors also often have a specific investment horizon determined by when the capital is needed. Since investment products are seldom managed for specific investment horizons, investors are left to the ebb and flow of the markets. This often leads to the outcome at the end of the investment horizon not being what was planned for.

This is where outcomes-based investment strategies can add value when applying a goals-based wealth management approach.

Outcomes-based investing differs from traditional investment strategies in terms of...

How success is measured

Traditional investment strategies usually measure success relative to some benchmark or a target return. Outcomes-based strategies defines success in terms of delivering an end value within a predefined range. This assists in defining and quantifying realistic expectations for a client.

How risk is defined

Private investors define risk in terms of losing capital and the chance of not achieving their goal. Outcomes-based investment strategies manages risk by applying a probability of outcomes to the asset allocation decision and by minimising the downside risk.

The focus on consistency

Another key difference between outcomes-based and traditional investment strategies is the focus on consistency of outcomes. Outcomes-based investments are actively managed to consistently deliver the predefined range of outcomes over a rolling investment horizon. This reduces the risk of the client’s entry point into the markets.

Preserving capital

Because risk is defined in terms of not achieving the desired outcome, outcomes-based strategies incorporate a predefined lower and expected outcome range. The predetermined probability factor is used to reduce the risk of underperforming the lower outcome which, barring a black swan type event, reduces the risk of not preserving the capital over the investment horizon.

Outcomes-based investing is an innovative approach that changes the conversation from which fund is the best compared to its peers, to which solution has the best probability to deliver a specified rand value at the end of the specified investment term.

An experience clients’ value

By adopting a goals-based wealth management philosophy in your advice business, you are changing the value you bring to clients from matching a need to a product, to being the trusted coach, planner and consultant needed to guide them to financial wellbeing. That is the ultimate competitive advantage for a financial advisor!


Marius van der Merwe

Chief Executive Officer

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