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What is goal-based investing and why it was time for an outside-in approach to investing, starting with the customer

Sameer Datye kicks off his 10-part series on wealth management trends with #1: Goal-based investing.

Sameer Datye / March 02, 2021

For long, financial advice has been centered around cash flow planning - a very “inside out” approach that uses cash flows to project where the customer’s investment can “potentially reach”. Goal-based planning on the other hand is the aspirational model that works “outside in” by asking the customers to choose their financial goals.

Then, instruments and strategies are suggested to meet them within the risk parameters best suited to that specific customer. With goal-based planning, the planning happens backward from an expected end-result. The outcome is the focus and not the method or the tools. Goals can be myriad - ranging from wanting to have a summer cottage by 2030, achieving retirement by the age of 45, creating a sustainable pension payout etc. A goal-based planning approach enables tailored fitment. The customer's aspiration and not cashflow is now at the centre of the universe.

This requires a diametrically opposite change in the way financial advice has been rendered till now. Generic and commoditised advise dished out earlier is obsolete. Financial advice has to be now tailor made specifically for the unique condition sets for an individual customer. To make things more grounded and transparent, the customer needs to know the probability of achieving the goals and the actions needed to optimise the chances.

Ronald Janssen of Ortec Finance says, "Goal Based Planning is based on a client centred approach. The personal goals of a client are translated into an optimal investment plan. In many cases the savings account delivers not enough return, so consumers must take risk to have a realistic probability to realise their goals".

The customers want or at least need a perception of being “in control” of own aspirations and methods to finance the same. Technology makes it possible to have real-time analysis of the progress, potential corrective actions in case of divergence, instrument options and availability, risks, costs etc. These multiple dimensions of viewing finances has imbibed an objectivity into the thinking process. Now, financial planning is no longer a subjective esoteric process. All parameters goals, returns, risks, divergencies from plan are measured in cold numbers. All “safety nets” in terms of hedging, diversification and other risk management protocols also has to be clearly defined. This gels well with the new digitally savvy and financially aware customer. The one who listens to his financial advisor but now questions, tracks, verifies and completes several routines in self-service mode. 

This is a new and tricky situation for the wealth manager. Information overload is a double-edged sword. A false sense of confidence with a know-all attitude of this “Robinhood” trading generation can easily slip into foolish bravado leading to financial havoc. Having too many options could also mean constant switching of financial advisors as well as financial strategies. For goal based investing the customer should know their goals to start with. Furthermore, they should also be able to articulate the goal in tangible manner in financial terms. This is easier said than done. As Michael Kitces & Carl Richards argue that we humans are not tuned to visualise a future vastly different from today. In their podcast they present the idea of possibility-based planning that helps customers discover their goals with meaningful dialogue.

Fredrik Davéus of Kidbrooke thinks that goal-based investing and financial planning will have to improve both scale and spread in ways unseen so far and will need to have truly holistic capabilities. Scale is essential to ensure availability at a lower unit cost and maximise reach to end-customers. He further elaborates that this needs to be spread by being included in far more contexts than what is typically the case today, e.g. customer credit decisions, asset purchase decisions, and holistic investment and savings decisions.

This resonates perfectly with what we have encountered and learnt in recent customer interviews. Goal-based investing solutions helps the customer with visibility, accessibility and actionability towards a financial future of choice within the known limitations. 

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TietoEVRY has been making pioneering efforts to catch latest trends with its WealthMapper platform. Goal-based planning tools from industry leaders like Ortec Finance and Kidbrooke are pre-integrated on the platform. WealthMapper is a modular digital toolkit that utilises the latest developments in technology and distribution to speed up innovation and time-to-market. This empowers financial institutions to create meaningful conversations with their customer and offer self-service tools to their customers. Feel free to reach out to me for further details.

READ THE FIRST BLOG POST IN THE SERIES: 

Top 10 trends impacting Wealth Management in 2021
 
Sameer Datye
Head, Insurance & Wealth Solutions

Sameer is responsible for insurance and wealth solutions. He actively promotes open ecosystem thinking that powers our WealthMapper and Insurance-in-a-Box platforms. At TietoEVRY, he has a long experience of working within the Healthcare, Insurance and Wealth domains. Prior to this, he worked as a product manager and a brand manager in the food, processing and packaging industry. He is passionate about translating technology innovations to business reality leading to better quality of human life.

Author

Sameer Datye

Head, Insurance & Wealth Solutions

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