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This investment strategy enables advisors to help clients meet personal objectives without chasing returns .

By Tony Davidow

MPT has helped advisors and investors understand the advantages of diversification by minimizing risk , with the correlation across asset classes serving as the “ secret sauce .” However , MPT is built on several flawed assumptions , including the notion that investors are rational and will select the optimal portfolio . MPT also relies upon historical return , risk , and correlation data to design the optimal combination of asset classes to either maximize returns for a given level of risk or minimize the risk for a desired level of return . but what if equity returns and bond yields are lower in the future ? What if the correlations across asset classes remain elevated ? Unfortunately , using flawed or outdated data may mean that investors fall short of both their return and income requirements . This is precisely the environment we find ourselves in , with capital market assumptions projecting substantially lower returns and income over the next 10 to 20 years . Correlation data has been steadily rising due to the interconnectivity of the global markets .

MPT is mathematically driven , with the inputs determining the outputs . behavioral finance is emotional , focusing on how investors respond to stimuli . Mean-variance optimization is designed to maximize returns for a given level of risk or minimize the risk for a given return target and has certain built-in limitations , including the viability of the inputs .

Goals-based investing recognizes that investors are often solving for multiple goals simultaneously and maximizing returns may not be one of those goals . This investing strategy moves the wealth advisor ’ s discussion from outperforming the market to achieving client goals while aligning the portfolio allocation to those specific goals .

Goals-based investing is designed to increase the likelihood of achieving life goals : accumulating wealth , generating income in retirement , saving for college , giving to charities , or some other specific outcome . Affluent families pass on wealth from generation to generation through trusts , and they often fund numerous charitable activities . They may have multiple account types with different goals and objectives for each . Goals-based investing also provides the flexibility of solving for multiple goals across multiple portfolios .

Goals-Based Wealth Management

Goals-based wealth management marries financial planning and investment planning , providing a road map for investors in achieving their goals . It begins with the discovery process , trying to understand the HNW family ’ s objectives . Where the traditional approach is to solve for multiple family needs in one portfolio , goals-based investing provides a framework for solving multiple goals , with different cash-

48 | financial advisor magazine | may 2022 www . fa-mag . com