Goals-based investing is about building and managing investment portfolios to achieve particular outcomes. Goals-based investing focuses on achieving the specific results desired by the end client, the investor, rather than more arbitrary market benchmarks.
Institutions have been investing in this way for decades but, until now, it hasn't been readily available to retail investors. For example, an insurance company manages its exposure to likely claims by 'matching' the maturities of their investment to meet their expected payouts. It is commonly called 'liability matching investing'. It is a simple risk mitigation or cash flow management exercise. More recently we've seen the Future Fund set up to achieve specific investment objectives, in their case CPI + 4% to 5% over the long term.
Similarly, all investors have goals. When being applied to an individual or family group, typically there are many goals. Helping clients to achieve their specific goals makes for happier and more satisfied clients, which, as we know, is good business.
In this paper we explore what we mean by goals-based investing and why it is being adopted by growing, client-focused financial planning businesses.
What are goals-based investment portfolios?
A goals-based investment (GBI) portfolio is designed and managed to meet the clients' specific needs directly. These will typically fall into one of three broad categories:
- time-based—cash flow or liability matching over short-term, mid-term or long-term
- return-based—targeting required rates of return to meet capital needs over the long-term. i.e. CPI+ or cash+
- risk-based—managing risk to specific levels acceptable to the investor (such as a risk tolerance level). When used individually or in combination, these three categories can be applied to meet any investor's needs.