Goals-based financial planning is on the rise across the globe given the demand by investors to have more certainty in financial outcomes.
With the global financial crisis (GFC) still fresh in mind for many, investors are averse to diminishing their retirement funds or gambling their savings by investing in so-called balanced funds piled with equities.
Instead, people are putting certainty and risk management first, and asking their financial planners to do the same.
This is helping to underpin the rise of goals-based financial advice, which puts investors’ financial goals at the centre of the advice process.
Once those individual goals are established, advisers then look to investment solutions and products that are targeted at meeting those outcomes – this is in stark contrast to the risk profiling approach that identifies the tolerance for volatility and losses and then puts a portfolio plan in place that may not link to an investors goals.
As part of this process, advisers are accountable to the achievement of that outcome, as are the fund managers that they use to construct the portfolios.
That’s because the success of a goals-based financial plan is not tied to outperforming benchmarks such as stock market indices, rather, the success of the financial plan is measured by how well an investor’s portfolio is tracking against his or her stated goals.
In other words, the biggest risk measured is not achieving the stated goal.
Independent financial advisers (IFAs) have welcomed the goals-based advice approach – so much so that a new association has been launched called the Association of Goals Based Advice to help IFAs transition their businesses to align with this movement.
Investors are going to IFAs and telling them exactly what they want – and clearly stipulating what they don’t want.
Whether it’s losing their money or being overexposed to share markets, Australian investors are now much more aware of their desired financial outcomes, and articulating them loudly and clearly.
It’s logical that investors are not interested in achieving ‘relative returns’ against stock market indices or against composite benchmarks in the case of balanced funds.
Such esoteric targets have no meaning for people – for most, risk is about losing money, capital preservation therefore becomes a key outcome.
Warren Buffett defined this well when he said “rule No. 1: never lose money, rule No. 2: never forget rule No. 1”.
This is a key component of how most investors think about risk management.
Innovation in asset management
This has led to demand for outcomes-based investment products, which is driving pockets of innovation in Australian funds management.
Outcomes-based investing is about creating wealth and achieving a positive absolute return for investors whether equity markets are rising or falling; it’s about avoiding the loss of money measured over a full investment cycle.
Importantly, outcomes-based investing means fund managers do not hold stocks just because they form a key component of a benchmark index.
We only hold stocks when they offer a considerable amount of upside (long) or downside (short).
For every investment that Monash Investors may make, a price target is applied for what we want to achieve, and we only invest in an equity if we can get that payoff.
When we get it, we exit a position. That’s in line with that the investor wants, a clearly defined target and its achievement.
In contrast, most mainstream Australian equity managers are simply aiming to beat the market.
Most view risk as the volatility of their returns (standard deviation) measured against a certain stock market index or their benchmark. Mainstream managers will therefore often own stocks that are not performing well because they do not wish to deviate too far from the index.
So, they often own banks and resources because they are so broadly represented in the benchmark index, regardless of the cycle or valuations.
With this view, if the index they are tracking falls by 25 per cent and the manager falls by only 20 per cent, they would consider that they have done a very good job for their investors, but we beg to differ, as would most investors, who want to keep their capital intact.
At Monash Investors, we target double digit returns per annum over a full investment cycle and aim to preserve investor capital measured over rolling three-year periods.
We focus our attention on compelling opportunities no matter where they are in the index – from small and mid-cap stocks to large companies.
If compelling stocks cannot be found, we simply hold cash and patiently wait until they present themselves.
This process delivers investors a satellite option that can complement direct holdings, ETFs and benchmark-aware managers, and provides them with greater certainty over the investment outcomes they receive.
Simon Shields is one of the co-founders of Monash Investors.
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