Goal-based wealth management

Who else can say this? Our goal-based portfolios are individually customised and dynamically maintained to deliver client-defined outcomes for each goal, within agreed tolerances and at specified dates

Moving to an investor-centric world
Goal-based investing is the missing link between financial planning and private-client portfolio management. Financial Planners (or IFAs as they used to be called) are increasingly using cash flow planning tools to illustrate how a client’s financial future might look.  This is all to the good and represents a positive move forward from the old days of simply selling a narrow range of products to try and met a wide range of needs.  However, cash flow planning that is not directly linked to portfolio construction is of very little use.  Not only is the cash flow planning function not linked within the investment management function, the two are very often carried out by completely separate firms with planners increasingly preferring to outsource investment management to third party discretionary investment managers.

Creating the link between planning and investment management, via the shared use of the same expert systems, is what makes Fowler Drew unique in wealth management.

Traditional private portfolios rely on asset-class diversification to limit volatility within bounds that are deemed appropriate based on the answers given in abstract attitude to risk questionnaires.  In this approach volatility is positioned as being the main risk metric. The only link here between client and solution is that both are rated by the adviser as ‘x’ (for instance, ‘Cautious’) on some notional spectrum for that single risk metric. Given a choice, most people would prefer their investments to go up in a predictable linear fashion and of course, if capital is required in the short term, this is precisely how returns should be earned.  However, when looking at capital that can be invested for the longer term, feelings regarding the path of returns might be very different if one path leads to low levels of deferred spending and the other to much higher levels. A single metric is too simplistic. Using it to link problem and solution, without the engagement of the client, is not reliable.

Proper goal-based and outcomes-driven portfolios rely on a separation between insurance-like hedging assets and a diversified portfolio of risky real assets to keep outcomes (normally expressed as spending levels in today’s terms) within a range specified by the client. The mix of hedging and risky assets can be made specific to every relevant consumption time horizon (for example, in the case of a spending goal, we construct an optimal mix for each separate year of spending). No two portfolios should be expected to be the same except randomly.

This makes desired and required outcomes the link between planning and the portfolio. But it is also one that the client is directly  and continuously engaged with. In portfolios with defined goal outcomes, clients’ constraints and trade-offs are determined using the probabilities of achieving those outcomes at the required horizons. They are directly revealed by the client in an iterative planning process without needing interpretation, provided only that the client can visualise and think about the consequences of different outcomes.

The effect is that clients, not the adviser, are in control. Clients can be sure the adopted approach is a suitable solution and free of bias. If goal-based, defined-outcome investing were adopted throughout private-client advice, there would be a lot fewer problems with the industry providing unsuitable solutions and regulators would not have to struggle to assess suitability after the event.

An academic perspective:
“Dealing with a private client usually leads to a detailed analysis of the client’s objectives, constraints and risk-aversion parameters, sometimes on the basis of rather sophisticated approaches. Yet it is striking that, once this information has been collected, and sometimes formalised, very little is done in terms of customising a portfolio solution to the specific needs of the client. In general, the approach consists of providing several profiles, expressed in terms of volatility; in some instances a distinction in how the capital will eventually be accessed (annuities or lump-sum payment) is made, but the client’s specific objectives, constraints and associated risk factors are simply not taken into account in the design of the optimal allocation.” Edhec Risk Institute; Asset-Liability Management in Private Wealth Management; September 2009

How it works:
Three phases

1. Planning
You visualise the benefits you want money to provide at every life stage, through the lens of your values, ambitions, the people that matter to you. Our experts and expert systems help you turn those benefits into one or more defined goals. The expert system relies on probabilistic modelling to identify the combination of four plan variables, resources, time, risk and outcomes, which provides most satisfaction. The variables are not selected by us as being (in our judgement) ‘suitable’ but by a collaborative process in which you demonstrate your preferences by thinking about consequences of different probabilities. The adopted variables, which are then demonstrably suitable, will dictate how one or more goal-based portfolios are then to be managed by us. 

2. Implementation
We set up a cost-effective set of third-party custody and dealing arrangements with accounts (pensions, ISAs, taxable dealing accounts) for each associated individual contributing resources to a goal. The sum of those accounts represents the ‘virtual’ goal-based portfolio. 

3. Continuous portfolio management
As you move through time, both personal circumstances and changing goal horizons should logically alter the optimal investment strategy to deliver the planned outcomes within the agreed tolerances. With time, and with the progress of the goal-based portfolio, your ambitions may also alter. This means you need continuous control of the variables that will determine outcomes, turning investment management into a process of continuous financial planning, albeit with less intensity and experimentation than initially. Hence we refer to our process as Controlled Outcomes Investing. We provide the means of control through regular interaction with the model for your goal. This may be prompted by you, if circumstances change, or by us, as a reaction to changing market conditions and the options that presents. This does not involve you in every decision but it does give you control at a high level – the level that most determines outcomes. Other wealth services can be provided as needed throughout our management of the plan.

Goal examples:

  • Securing lifetime lifestyle (whether from earned income, retirement income, savings or capital)
  • Specific needs such as school fees, business formation or business investment 
  • Aspirations (whether capital or income projects)
  • Bequest (gifts to heirs or charities, during lifetime or on death) 
  • Self-funding of insurable risks
Why we create a framework of personal goals
  • Goals have outcomes clients can relate to
  • It’s how people typically visualise their core or indispensable needs
  • And how they think about their desires and more ambitious aspirations
  • It helps them think about consequences of better or worse outcomes
  • Which helps them quantify any needed constraints and tolerances
  • ‘Mental accounting’ helps to frame their planning
  • But it also helps their reactions to events
What we do with the goal framework
  • Assign total resources to one or more different goals
  • Prioritise between them and define any dependencies between them
  • Associate accounts and legal owners to create each ‘virtual’ goal-based portfolio
  • Make risk preferences specific to them
  • Manage investments differently for each
  • Ensure constraints and tolerances are complied with
  • Measure portfolio progress forwards – to planned outcomes
  • Measure and benchmark actual performance at virtual portfolio level
  • Use it to discuss adjustments to plans in light of progress or circumstances


Why we use systematic investment decision processes
  • Modelling can solve complex planning problems in finance
  • Longer-term investment plans lend themselves best of all to modelling
  • Probabilistic modelling allows portfolio planning to be based on chances of achieving goals
  • Constantly updated chances make for a more useful dialogue with clients
  • Rules-based investment decision making is objective and helps exclude behavioural biases
  • Avoiding behavioural biases has been shown to improve investment outcomes
  • Mathematical processes are not only better but also cheaper to provide
  • These advantages have been demonstrated by us over multiple market cycles
How the format differs from both advisory and discretionary
  • You have control at a high level and can safely delegate the fully-customised  implementation
  • With discretionary management, you delegate everything but end up with a standardised solution
  • With investment advice (whether an IFA or stockbroker model), you control every transaction, approving or rejecting recommendations, but you have no control over the outcomes of the whole portfolio because you have no information about them, only about the individual changes