Focus on clients’ goals when deciding investment strategy

A growing focus on the goals-based investment process is leading to a change in dialogue between financial advisors and their clients, according to Lionel Martellini, professor of finance at EDHEC Graduate School of Business in Lille, France, who spoke at the Investment Management Consultants Association’s annual conference in Toronto on Tuesday.

“What we have been doing for a long time as investment managers is we have been very active at talking about ourselves [with clients],” said Martellini, who believes advisors have spent too much time communicating their own success in generating positive returns for clients.

The conversation between an advisor and a client instead must focus on the client’s goals and prioritizing those goals, according to Martellini, who explained the main elements of a goals-based investment process to the audience of advisors.

Specifically, advisors must first understand a client’s essential goals and aspirational goals before making any investment recommendations.

The essential goals are those that are affordable and securable, such as producing a certain level of replacement income during retirement. Essential goals are the top priority for the advisor, said Martellini.

Aspirational goals are secondary objectives and can include increasing a client’s current level of wealth.

“Aspirational goals are the ones that we would love to have but we don’t know if we [will achieve] them,” he explained. “But we want to make sure that we have at least the highest chance of achieving them.”

The advisor’s role during this conversation is to listen to the client as well as educate him or her, as that individual may not have a realistic view of which goals are affordable and therefore can be appropriately classified as an essential goal, said Martellini. Unaffordable goals must be categorized as aspirational and the advisor must communicate this to the client.

An advisor must also decide on the best way to hedge, diversify and insure the client’s overall portfolio in order to facilitate the client’s essential goals and increase the likelihood that his or her aspirational goals will be met.

The goal-hedging aspect of the portfolio is the part the will secure the essential goals and must be considered safe assets, said Martellini: “[The assets] aren’t being held for performance purposes, they’re being held for safety purposes.”

The client should still have leftover funds that can be invested into a well-diversified performance-seeking portfolio. This will look to generate returns that can be put toward the client’s aspirational goals.

The insurance aspect of this process means deciding on the number of dollars that can be used for the performance-seeking portfolio without jeopardizing the possibility of reaching the client’s essential goals. It also requires a commitment to reconfiguring that allocation between the goal-hedged portfolio and the performance-seeking portfolio if it seems that the client’s essential goals are at risk, which could occur during a market downturn, Martellini said.