flow needs and time horizons , with multiple portfolios . The goals-based wealth management process considers the various family goals .
Discovery Process : What are the family ’ s needs and wants ? What are the various account types ? What is unique about each account type ?
Reviewing trust and estate issues : What types of trusts have been established ( living , revocable , irrevocable , generation skipping , etc .)? How are assets distributed ? Who receives them ( children , grandchildren , charity , etc .)?
Establishing goals and objectives : What are you solving for ( per account type )? What are the cash-flow needs and various time horizons ?
Developing asset allocations : What are the return objectives for each account type , the income requirements , the time horizon to achieve the various goals , and the liquidity requirements ?
Selecting the right investments : Which fund or manager can generate the required outcome ? What are the structural trade-offs among mutual fund , ETF , separately managed account , registered fund , or private fund ? How should you incorporate active and passive strategies ? What role do alternative investments play in this diversified portfolio ?
Monitoring progress relative to goals :
figUre 1 :
A Means To An End : Asset Class Priorities
Growth
Income
Inflation Hedging
Domestic Equity
Treasurys
Cash
International Equity
Corporate Bonds
TIPS
How are the managers and accounts doing relative to their stated goals ? Have there been changes to the family ’ s circumstances ? Do you need to make portfolio adjustments ?
Advisors who adopt a goals-based wealth management process must be consistent in measuring progress relative to goals . They cannot fall into the trap of emphasizing performance in rising markets and goals-based investing in challenging environments . Their performance measurement tools need to evolve to report progress appropriately , rather than emphasizing performance relative to the S & P 500 or some other arbitrary benchmark .
The Means To The Ends
A client ’ s portfolio is the means to an end . It ’ s how their wealth grows over time and how they achieve their desired outcomes . Adopting a goals-based approach does not mean that wealth advisors should ignore performance , but rather change the utility function to solve for a family ’ s objectives . HNW families obviously want and expect access to the best investment strategies . However , if the top-performing strategies come with high volatility and high turnover , then their value may be negated on an after-tax basis .
Equity Hedge
High Yield
Macro
Real Estate
Infrastructure
REITs
Defensive / noncorrelating
Commodities
Commodities
Multi- Strategy
Infrastructure
Private Equity
Private Credit
Natural Resources
Natural Resources
If assembled correctly , portfolios can solve for specific goals , and if you properly understand the role of each investment , you can measure its effectiveness in the overall portfolio . As covered throughout my book Goals-Based Investing , I tend to think of asset classes as puzzle pieces . If they fit together well , they provide a clear picture of what the portfolio is designed to do . If they are put together in a haphazard fashion , the portfolio ’ s purpose will not be clear . ( See figure 1 .)
To help clients understand the role of various investments in their portfolio , I like to use puzzle pieces to illustrate the individual role of each investment , and how they need to come together . This puzzle piece analogy works well with clients because it helps demystify the individual investments and establish their role in a diversified portfolio . It is more intuitive for clients if we frame the investments in terms that they understand , such as growth , income , defense , and inflation hedging .
This framework establishes a more effective way of measuring each investment ’ s success and failure . Commodities like gold are not in a portfolio to outperform the S & P 500 . They are a defensive asset , included in a portfolio to provide safety and stability in the face of market shocks and help hedge the impact of inflation . Fixed income , as the name suggests , is designed to generate income in portfolios , and equity-oriented strategies are focused on generating growth .
This framework also makes it easier to include complex investments like alternative investments . Alternatives are valuable and versatile tools , but they can be confusing for investors to understand . Using this framework simplifies the discussion considerably by putting the investment into terms investors understand .
By framing the asset class discussion like this , advisors can move investors from benchmarking everything to the S & P 500 in rising markets and to cash in falling markets . HNW families may own many of the same asset classes across account types but may weight the
may 2022 | financial advisor magazine | 49