UHNW Investors Don't Grasp Goals-Based Investing - Study

Tom Burroughes

6 June 2017

Some of the wealthiest investors in the US aren’t necessarily all that clued-up about the smartest way to manage their money, raising questions about their expectations of markets and funding certain goals, a study showed. In particular, it appears a significant number don't understand what goals-based investing means in practice.

According to SEI Private Wealth Management, its survey of 300 ultra-high net worth individuals in the US shows that these persons and their advisors may be using the wrong way to measure investments and their goals.

Survey respondents included those who use a financial advisor exclusively , those who take a do-it-yourself approach , and those who use a hybrid method , employing a combination of the two.

Most of the UNHW individuals are confident about their personal finance expertise, with two-thirds claiming they have extensive or considerable knowledge of financial and investment management. While over half report that their primary investment strategy revolves around index benchmarks, 40 per cent indicate their primary strategies are for their investments to fulfil personal and/or financial goals.

A two-thirds majority also claim they are familiar with a goals-based investing approach, which designs portfolios to meet a specific return, risk, and time horizon target for an investor’s defined financial goals. However, at 44 per cent, close to half inaccurately define the concept as a measure of benchmark performance.

“There appears to be a substantial need for education around investment strategies, especially in understanding a true goals-based investment approach,” Michael Farrell, managing director of SEI Private Wealth Management, said.

“Short-term portfolio performance gives clients a false sense of confidence. If they beat the benchmark, but can’t buy that dream home, their approach has failed. It’s vital for them to be able to determine and anticipate long-term wants and needs, and to ensure their advisors are successfully employing the right strategy that delivers on tomorrow’s goals,” Farrell said.

Of those ultra-high-net-worth individuals who use a financial advisor exclusively, some 65 per cent state it’s extremely or very important that their investments measure progress toward personal and/or financial goals, rather than just performance; 88 per cent assert their GBI approach is extremely or very effective in meeting their objectives, and 94 per cent believe their financial advisors use a GBI approach.

Goals-based investing hinges around the idea that the objectives and risk tolerances of clients shape how money is put to work, countering traditional approaches that have tended to focus on which particular asset class are the strongest performers. GBI has become a term used, for example, in discussions around the rise of robo-advisory wealth management models, as well as even among traditional institutions. GBI is seen as a more "client-centric" approach to money management. With the arrival of the Department of Labor's Fiduciary Rule, and greater regulatory demand for suitability of investment to be given higher prominence, goal-based investing is also rising up the agenda.

Contradiction
This seemingly positive data is contradicted by the 56 per cent of advisor-exclusive investors who define GBI as a measure of performance. More than half of those survey participants who are unfamiliar with GBI or unsure whether their advisors take that approach indicate they are in favour of it. In fact, they claim that it’s extremely or very important that their investments measure progress toward personal and/or financial goals, rather than just performance.

“There is a strong disconnect between consumers’ intended investment purpose and their understanding of how to achieve those goals over the long-term,” Jeff Ladouceur, director of SEI Private Wealth Management. “If investors do not understand goals-based investing themselves, how can they be sure their financial advisors are using that approach when managing their wealth?”

Taking it digital
Looking to the digital world with a significant dependence on technology, 69 per cent of respondents said it is extremely or very important that their financial advisor use and/or provide the latest technologies.

With two-thirds expecting the ability to interact with their advisors remotely, only 29 percent said that service is provided by their advisors. Additionally, more than half require the ability to track and measure progress toward goals themselves, while 43 per cent said it is provided.

Ranking the greatest technological benefits, 29 per cent and 28 per cent of survey participants asserted technology helps them make better decisions and be more self-sufficient, respectively. More than a third uses a robo-advisor to help manage their investments.