Goals-Based MBA – Lessons and Advice

November 12, 2019

Goals-based wealth management can go beyond the portfolio

J. Womack is one of our newest contributors on Practically Speaking. He is the managing director of investment solutions for Independent Advisor Solutions, responsible for the development of strategies for the mass affluent and high net worth. He works with Registered Investment Advisers and Broker/Dealer-affiliated advisors to help deliver these solutions to their clients. In today’s post, J. explores goals-based wealth management, the bedrock of our investing philosophy, drawing parallels to his personal experience earning his MBA. 
Please enjoy! ---JDA

When I tell people about my experience moving to the Northeast from Southern California, I’m frequently asked, “Why?” After jokes about better weather, I often discuss the journey that brought me here. Despite the allure of a debt-free MBA via scholarships, I chose to attend the Wharton School at the University of Pennsylvania with goals of graduating with a finance degree and transitioning into a financial services industry career.

At the time, my uncle, a retired attorney, was focused on the utility of an MBA and thought I was crazy to pass on scholarships for programs that he felt were of equal quality. I discussed with my father, a financial advisor, why I wanted to attend Wharton versus other schools, what I saw myself doing with the degree, what I would have to do to succeed, and my expectations for the return on my investment. In the end, the two men that I trusted most wished me well and told me to do what I thought was best, but their rationale stuck with me.

Be true to your school

My experience is just an example of the decisions that we all face, in particular in our financial lives, as we seek to achieve the goals we have set for ourselves. Much like my own journey, a person’s complex financial life is filled with uncertainty and ups and downs, and a good advisor can keep their clients focused on their goals and help them ultimately achieve them. As I considered making a significant investment in the pursuit of an important goal, my father took me through a similar process as that SEI’s goals-based wealth management framework advocates for our advisor clients:

  • It begins with engaging clients in co-planning to get a better understanding of what is important to them.
  • It hinges on helping clients understand the risk they are taking and aligning the right strategy with each objective. 
  • Finally, success depends on coaching to consistently reinforce what matters to each client in order to help achieve their desired goals.

Understanding what’s important (co-planning)

Going back to my personal example, my uncle’s initial advice was guided by his belief that he saw no meaningful difference in the quality of the education that I would receive based on the programs to which I was admitted. My father, through conversation and a discovery process, realized that it was not just about getting an MBA; it was about getting a Wharton MBA. 

As a financial advisor, it is important to not only understand your clients’ goals, but also their core motivations for those goals.  Many advisors would claim to engage in a process of discovery to identify their client’s goals. Co-planning is different: It’s about collaborating with clients through the discovery process to develop a true understanding of their core motivations. This approach helps lead to the right advice for clients’ unique goals and increases their commitment to the financial plan that is ultimately created. More importantly, it establishes the foundation for effective ongoing coaching as the inevitable ups and downs come. 

Aligning strategies with objectives (risk assessment)

Investment of any type comes with some level of risk. We are usually comfortable dealing with that risk because we want to achieve a particular goal. When we can clearly associate the risk we are taking with the goal we want to achieve, we should feel comfortable taking it. Clear association of an investment with its associated risks is particularly important if an individual has multiple goals. 

In my case, I made a significant financial investment over two years to achieve two goals: graduating with my MBA and transitioning into a career in finance. I was drinking from a firehose during my program’s first year. While I ultimately succeeded, it was not without some anxiety. I had not allocated my time in a way that clearly aligned with my distinct goals. As a result, I was always reacting in a real life game of “Whack-A-Mole.” During my second year, I was intentional about clearly aligning the time I was investing with each of my goals – graduating and starting my career. That clear alignment of time with my objectives helped me to achieve each goal with less anxiety. 

Goals-Based InvestmentsThe same holds true when investing on behalf of clients. Most clients have multiple financial goals and core motivations for each. By aligning specific investment strategies with each of those goals in distinct portfolios, the added clarity can reduce the anxiety that clients feel over time.  When an advisor invests in a single portfolio to achieve all a client’s goals, there is no segmentation to create a clear alignment between the risk being taken and the portfolio’s ultimate objective. This can lead to increased anxiety, in particular when volatility or other uncertainty sets in.

Markets, like life, are unpredictable – and so are clients (coaching)

How we respond to opportunity and adversity can determine whether or not we reach the goals we have set for ourselves. The same holds true for investing, where uncertainty can trigger any number of reactions that may work against us. Left to our own devices, behavioral biases like loss aversion and herding can cause us to take actions that can negatively impact our financial goals. Dalbar’s 2019 Quantitative Analysis of Investor Behavior report estimated that over the last decade the average equity investor has realized an annualized return of 9.7%, versus an annualized return of 13.1% for the S&P 500. Over the past 30 years, the difference is greater, with the average equity investor realizing an annualized return of 4.1%, while the S&P 500 has annually returned approximately 10%. The evidence of individual investors’ inability to deal with uncertainty in financial markets is compelling. Given the data, is there hope for anyone to achieve his/her goals?

Coaching is key

Coaching is the key. Market volatility can present meaningful investment opportunities just as much as it can cause investors to miss out on potential returns. It’s the response to perceived adversity that creates opportunity. From my junior year at USC through the completion of my graduate studies, I faced different challenges that presented adversity and opportunity. Sometimes I needed a good pep talk from my trusted advisors. That invaluable coaching is a part of what led to the realization of my goals. 

While clients may often believe they know what the right thing to do is, there are moments they may want to take action that could work against the potential for them to achieve their financial goals. This is clearly evident in the Dalbar study’s data. Even when clients are fully committed to a plan and their investment strategies are aligned directly to goals in separate portfolios, there will still be moments where they need a pep talk.  As a financial advisor, a client has entrusted you to help them achieve their goals, and it is critical to leverage the core motivations discovered through co-planning in the ongoing process of coaching clients. It is at these critical moments that clients can realize the full value of financial advice.

Legal Note

Investing involves risk including possible loss of principal.
Average stock investor and average bond investor performance results are based on a DALBAR study, “Quantitative Analysis of Investor Behavior (QAIB), 2018” DALBAR is an independent, Boston-based financial research firm. Using monthly fund data supplied by the Investment Company Institute, QAIB calculates investor returns as the change in assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period.
The Standard & Poor’s 500, or S&P 500, is an index made up of 500 top American companies and is an indicator of how the U.S. stock market is performing. Financial experts consider the S&P 500 to be one of the most accurate representations of the market. It is also viewed as a leading indicator of the future performance of the U.S. stock market.

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