Investors driving the market in 2008 didn’t see the downturn coming. Chasing high returns was the fashion. And some paid for it — watching their net worth rapidly dwindle and their personal financial goals drift out of reach. The tried and true path to paying for their child’s college, retiring at 65 or buying that summer cottage became more complex. A significant change in direction in how investments are managed was needed. Return-based models gave way to Goals-Based models. Goals-Based Wealth Management is a transition from the traditional thinking where investment success is measured by how well investments perform versus the benchmark in a given time period. Specifically, it is an integrated approach that measures success by the probability of meeting an investor’s wealth objectives within a certain time-frame.
Goals-Based Wealth Management has become the foundation for successful personal wealth management. It seeks to align an investor’s wealth objectives with investment and wealth strategies in an effort to raise the probability of meeting his personal goals without unnecessary risk.
Unlike traditional approaches where investment management and wealth planning are viewed separately, Goals-Based Wealth Management integrates these two strategies as a unified approach through the use of sophisticated technology. Resulting in models which seek to assess and illustrate the likely future of an investor’s cash flow, taxes, assets and liabilities and the probability of having enough money to meet one’s lifetime goals. We call these models “Wealth Plans.”
The first step in creating a Wealth Plan is to gather two types of information: the investor’s financial balance sheet and wealth objectives. The financial balance sheet includes a complete picture of all current and future assets, liabilities, income and expenses. Examples include investable assets, real estate, partnerships, employment income, future inheritance, social security, mortgage and established living expenses. Wealth objectives are considered to be spending goals, such as the date of desired retirement, estimated living expenses at retirement, children’s college expenses, second home costs and the desire to provide certain funds for loved ones and charity during life or upon death.
Once the investor’s financial balance sheet and wealth objectives are determined, the information is input into a model, which through the use of thousands of algorithms quantifies how likely it is that the investor’s assets will meet his wealth objectives. The Wealth Plan illustrates projected future values of the assets, estimated investment returns and risk, and the percentage probability of meeting certain wealth objectives within a period of time.
Since market returns are rarely steady year after year, it is important to have a Wealth Advisor run models that project return assumptions for a wide range of market environments — the highs, the lows and everything in between. These models are tools that allow investors the ability to make informed decisions related to investment and planning strategies and wealth objectives.
Wealth Plans provide investors the ability to visualize what may be the result of their wealth objectives if certain investment and planning strategies are implemented. There are many options within wealth objectives and investment and wealth strategies. In theory, each option can be thought of as a “lever,” and a lever can be adjusted to raise the probability of success. In reality, investors typically struggle with their multiple options simultaneously, and their Wealth Advisor can assist them with sifting through the implications of adjusting certain levers.
If the probability of success appears too low (generally considered under 85%), alternative options will be assessed, and certain levers may be adjusted. Estate planning techniques may be implemented, investment strategies may be tweaked, spending may be reduced, income increased, or gifting altered.
Conversely, if the probability of success appears very high, more ambitious goals may be considered. Investors may be more comfortable taking less investment risk for perhaps lower returns, retiring earlier, taking more vacations or purchasing that summer home. More sizable lifetime gifts to loved ones or charity may also be considered.
Life is not static and neither is Goals-Based Wealth Management. As personal circumstances evolve, so do wealth objectives. That is why it is important to continuously review your Wealth Plan with your Wealth Advisor to ensure that your investment and planning strategies continue to be aligned to successfully meet your personal goals. And, when warranted, changing course with investment and planning strategies, or perhaps even your goals may be prudent.
With the ability to visualize the impact of investment and planning options on your future, Goals-Based Wealth Management provides you with the tools and confidence to make more informed choices for your future. It guides you to stay the course with your plan during periods of rapid market fluctuations, like 2020, resulting in the greater probability that your choices will allow you to realize your long-term spending, estate, gift and philanthropic goals.
Suzanne S. Weston is a Wealth Advisor and Relationship Manager at The Glenmede Trust Company, N.A. Founded in 1956 as a trust company, Glenmede provides highly customized investment, fiduciary and wealth advisory services to high-net-worth individuals and families, and endowment, foundation and institutional clients, overseeing nearly $37 billion of assets under management as of 6/30/2020.