Are you ready for the next revolution in the financial services?

Transcription

1 GOAL-BASED WEALTH MANAGEMENT Are you ready for the next revolution in the financial services? You build wealth. We build solutions PureFacts Financial Solutions. All rights reserved.

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3 Table Of Contents Executive Summary Goals-Based Wealth Management Introduction What is Goals-Based Wealth Management (GBWM)? Why Goals-Based Wealth Management? Purpose for Wealth Advisors PureFacts Point of View Demographics Driving Demand for GBWM PureWealth Goals-Based Wealth Management Integrated Goals Based Software Solutions Goals Off-firm and Off-Book Assets & Liabilities Insurance Policies Estate Planning Tax Planning Goals-Based Solution Goals-Based Solution Data Diagram State of the Industry Summary Analysis Summary...11 About PureFacts...12 Appendix A: PureGoals Preliminary Mock Ups...13 PureContact Client Relationship Management...13 PurePortal Mobile Optimized Client Portal...14 Appendix B: Industry Perspectives on Goal Based...15 Wells Fargo...15 SEI Investments...16 Betterment...16 Merrill Lynch Page 3

4 Executive Summary - Goal-Based Wealth Management Would you tell me, please, which way I ought to go from here?' That depends a good deal on where you want to get to, said the Cat (Wealth Advisor). I don't much care where said Alice (Investor). Then it doesn't matter which way you go, said the Cat. so long as I get SOMEWHERE, Alice added as an explanation. Oh, you're sure to do that, said the Cat, if you only walk long enough. Lewis Carroll, Alice in Wonderland Goal-Based Wealth Management is a well-established investment strategy. Much of investing today is combining planning, taxation, resources and lifestyle with savings and asset management into a longterm retirement plan and goal. Goals-Based Wealth Management takes this one step further to fully recognize a range of goals and life events and supports multiple investment strategies each with a unique contribution pattern, timeline and risk tolerance. Goals-Based Wealth Management also considers off book assets and how they might play into an overall set of strategies. Goals-Based Wealth Management recognizes that individual goals may be interrelated. For example, an investor may save for a cottage to buy in 5 years and plan to sell in 30 years as part of a retirement plan. Finally, Goals Based Wealth Management engages the investor in the periodic planning process and provides clear reporting on expected results through continual planning and reporting the investor better realizes the value provided by the wealth advisor. Page PureFacts Financial Solutions. All rights reserved.

5 1. Introduction The purpose of this white paper is to provide an overview of goals based investing, outline several successful approaches and summarize the key decisions and choices that need to be made in developing a strategy. We also present PureFacts solution and roadmap strategy for goal based investing. Throughout this white paper the term Wealth Advisor has been selected to represent advisors, investment councils, portfolio managers and other client engaging roles within the Wealth Management Industry. We also use GBWM to represent Goals Based Wealth Management What is Goals-Based Wealth Management (GBWM)? Goals-Based Wealth Management (GBWM) is an investment process that identifies multiple investing objectives each with a unique goal, timeline, contribution stream and risk profile. Objectives might include buying a home, saving for a vacation, providing for education funding or retirement. Each objective may have a different investment strategy and different contribution and withdrawal patterns. Each goal is tracked and monitored to determine if the achieved rate of return and capital contributions and withdrawals are on track to meet the financial objective in the desired timeline. Some goals are interconnected. For example: saving for a cottage that can be sold in 30 years to add to retirement funds. Contributions may come from a variety of sources including existing financial assets, financial assets at other institutions, off book assets, inheritance, pension funds, insurance proceeds, business sales or the proceeds of another investment like a cottage or business. Goals can be set for individuals, families and/or households, and are typically set in conjunction with financial and tax planning by your wealth advisory team. The key feature of GBWM is setting clear goals, accurately reporting and continually engaging investors with consistent planning and reporting. Reporting details the progress of contributions and withdrawals and achieved rate of return to identify and communicate likelihood of goal achievement. A portfolio of Goals are likely to have inconsistencies or overlap. GBWM should reveal the inconsistencies or overlap to support the definition of a clear pathway to achievement of goals. The wealth advisor has an opportunity to discuss progress through suggesting adjustments if off course or recognize the success of their progress. Some firms choose to provide game-style reward systems to reinforce positive results. The client will likely have a set of independent goals. The wealth advisor can help the client make realistic decisions and prioritize their multiple investment strategies. The wealth advisor creates value through understanding the client's multiple objectives and unique resources and timelines. The relationship is built through the discipline of regular communication and adjustment toward achievement of goals. GBWM is also an opportunity for the client to be more involved and engaged. Allowing the client, the ability to add or adjust planned contributions or withdrawals and include assets with other advisors, off book assets, insurance policies or estate information provides the Wealth Advisor with a much broader and comprehensive view of an investor s wealth and a better position from which to add value. Wealth advisors can employ many strategies for helping clients select investments for each defined goal. Some have a small number of model portfolios to match a range of timelines and risk profiles. Others have a more custom approach. Others provide a "Robo" service or hybrid of traditional advice and Robo services. The choice is dependent on the type of clients the wealth advisor is serving and their firm s unique investment value proposition. Page 5

6 1.2. Why Goals-Based Wealth Management? Setting goals and tracking achievement is critical to success. A study of Harvard Business School MBA students in 1979 determined that 84% of the class had not set goals, 13% of the class had written goals but with no concrete plans, and 3% of the class has both written goals and concrete plans. 10 years later, the 13% that had set goals were making 2x as much money as the 84% and the 3% that had set goals and plans were making 10x more money than the 84% that had not set goals. Successful athletes, business-people and achievers in all fields set goals. Setting goals supports a long-term vision, while providing short-term motivation. If the most successful people set goals, why would an investor not set goals? There are typically several goals to consider. For example, retirement is typically number one, but people may also plan to leave a legacy at end of life or they may want to save for a home down payment, cottage, university education, vacations, safety net and other shorter term goals. They may have a business to invest in and diversify from. GBWM can effectively reflect the realities of a changing life. Investors may expect increasing salaries, bonuses, inheritance, sale of off book assets, increasing value of real estate, other windfalls, medical costs, other emergencies and can reflect these in their plans. Investors may have different risk tolerances for some goals and want to reflect these in their strategies. Investment Firms can create investment strategies or offerings tailored to each goal. Many investors want to be engaged in their plans. They want to see how they are progressing toward their goals and adjust their spending and saving accordingly. When investors feel ownership for their plans they will be more engaged and will share more information with their advisors. A goals-based investing and reporting approach will result in stronger relationships between the Wealth Advisor and Investor. Engaging in discussions, options and choices relative to goals help clarify recommendations. Investors are more likely to share more information about their assets and income sources if they feel in control of their plans. Investors will appreciate the work involved and be more willing to understand and pay fees. Engaged investors will be more successful in their investing. GBWM offers important advantages to both the investor and advisor: Greater likelihood of achieving desired goals More meaningful investment conversations between wealth advisors and clients Real world strategy for aligning financial strategies with life events Discipline of investing aligned with specific goals and monitored results Reporting against expected performance creates opportunity to adjust plans Discussion of risk and performance in context of client goals Better insight into client short and long term needs and objectives View of a broader range of client on and off book assets and resources Opportunity to integrate financial planning, tax strategies, investment offerings, Estate planning, Insurance needs, Trusts and Tax Liabilities Greater engagement from the client Greater real and perceived value for the client from engaging with a Wealth Advisor. Page PureFacts Financial Solutions. All rights reserved.

7 Purpose for Wealth Advisors There is additional value added for wealth advisors through improved client engagement and book of business growth. These are the top five reasons for wealth advisors to offer Goals-Based advice: 1. Revenue and Fee Growth Grow client portfolios by earning a greater share of a client's assets Attract and retain clients based on value and increased trust Ability to increase fee based revenues from their book Potentially convert off-book assets to on-book investments where it makes sense 2. Better understanding of clients risk, performance and contribution requirements by goal 3. Deepened client relationships leading to wealth advice provided across generations 4. More personalized service and value to the investor for fees charged 5. Ability to imbed GBWM into Robo services PureFacts Point of View PureFacts is not a wealth manager. However, our goal is to provide software enabled solutions that enable wealth firms to implement their unique approach to Goals-Based Investing. We will do this by providing flexibility in the number and naming of goals, contribution and withdrawal patterns, investment choices, timelines, tax impacts, expected rates of return, off book assets, insurance, etc. We will provide comprehensive reporting on the plans, expectations and results by goal. Goals based features will be provided through our standard modules, as opposed to a separate module. This ensures consistency of information and reporting. Our goal is to support your business growth in a way that makes sense to you Demographics Driving Demand for GBWM The wealth management industry is seeing a shift in investor demographics and an opportunity to provide a new level of service. Every investor can benefit from a clear set of goals for investing and adjusting products based on timeline, risk profile, and contribution ability for each goal. The following are three examples of target demographics interested in GBWM: 1. The Millennial generation (born ) now requires sophisticated investment advice to meet the needs for homes, vacations and eventual retirement. 2. Women are more frequently driving family investment decisions and are more inclined to have multiple saving and investing goals. 3. Over the next 15 years, the baby boomers (born ) will transfer a huge amount of wealth to the next generation while they manage their own retirements. Millennials have been identified due to their familiarity with technology and interest in being actively engaged in investment decisions and controlling their financial future. Millennials are a deeply trusting generation and the level of personalization and trust facilitated through the goals-based wealth advisor to client relationship will position them to realize the maximum value from their wealth advisor. Women represent many of the new investors and have high expectations of their wealth advisors. The level of personalization and frequency of communication in the wealth advisor to client experience through GBWM will appeal to female investors. Baby boomers, the second largest generation in history, are either in retirement or on their way to retirement. GBWM provides an avenue for wealth advisors to successfully engage with the entire household and retain the assets through the next generation. Page 7

8 2. PureWealth Goals-Based Wealth Management 2.1. Demographics Driving Demand for GBWM Our approach is to provide an intuitive software solution for our client partners that allows them to implement GBWM offerings in a way that aligns their firm s unique value proposition and the needs of their target clients. GBI features enable a holistic view of the investor and their household to ensure that the wealth advisor can make informed decisions on behalf of or together with the investor. Our solution includes access to five vital pieces of information in a holistic goals-based strategy: Goals Off-firm and Off-book Assets & Liabilities Insurance Policies Estate Planning Tax Planning We enable you unique goals-based strategy, you will be able to include any number of these components ranging from one to all. Our CRM, Reporting and Fee Calculator modules integrate goals based features Goals Our solution enables the wealth advisor to create, report and maintain goals for their clients at the individual or household level. Goals can include multiple accounts and accounts can hold a variety of investments. Investors can include any number of repeat, increasing or one time contributions or withdrawals and can select timelines for each goal. Investor contributions and withdrawals will be tracked on a monthly basis providing a reminder to the wealth advisor and investor if they are on track for the month and will roll up into a YTD summary. Output from financial planning software can be captured and integrated so that wealth advisors do not need to manually update goals. Asset and position information can be downloaded to the planning system to ensure the planning process data is up to date. For registered accounts there will be a report on contribution room to ensure that investors can receive maximum benefit for these account types. Goals-based reports are configurable based on the client partners requirements. A library of Ad-hoc reports and regulatory compliant client statements are provided to track your goals-based strategy and support informed decision making Off-firm and Off-book Assets & Liabilities Off-firm and off-book assets & liabilities can provide a more holistic view of the investor s financial standing. Off-firm assets and liabilities are wealth managed by other firms. Off-book assets and liabilities are investments in businesses, real estate, art, etc. The values of these off-firm and off-book assets and liabilities can be created, reported and maintain through the PureWealth Platform. The values associated to off-firm assets and liabilities can also be pulled into the PureWealth Platform via API from different financial institutions across Canada and United States. Page PureFacts Financial Solutions. All rights reserved.

9 Insurance Policies Insurance is key part to the financial success of investors as it protects them in a variety of ways ranging from complications in health to coverage of assets. Insurance policy details can be created reported and maintain through the PureWealth Platform. The policy details can also be pulled into PureWealth via API from different insurance and financial institutions Estate Planning Estate planning should be a seamless experience for the investor and their family. Estate information such as wills, trusts, power of attorney, etc. can be managed through the PureWealth Platform. The balances in estate accounts trust accounts, etc. can be pulled via API from various financial institutions Tax Planning Tax planning can provide additional value to investors. Tax information such as RRSP contributions, marginal tax rate, average tax rate, capital gains carry forward, etc. can be managed through the Pure- Wealth Platform Goals-Based Solution Our solution leverages four of our existing modules to provide an end to end goals-based strategy. Our goals-based solution will leverage PureContact, PurePortal, PureReports and PureStatements. PureContact is our client relationship management module designed for wealth managers, PurePortal is our client facing portal module, PureReports is our ad-hoc reporting module and PureStatements is our regulatory compliant statement module. Measure Define Enabling Your Unique Strategy Implement The goals based solution will allow adjustment of goals by the wealth advisor through the CRM and empower clients to suggested adjustments through the client portal. Contribution changes due to expected salary increases, bonuses, gifts, inheritance, sales of off book assets, etc., Figure 1 Goals-based communication strategy can be made by the advisor or an engaged investor client. Any contribution pattern, including lump sum and planned withdrawals can also be accommodated. This allows the client to be engaged in their investment plans and share a more comprehensive view of their anticipated changing resources with the advisor. The solution has tools to support an iterative process of defining a goal, implementing an investment strategy and measuring progress toward the target. Based on the results the advisor and investor may re-define their strategy or not. The client cannot make changes to actual investments. This is done in consultation with the advisor. Page 9

10 Goals-Based Solution Data Diagram The diagram below outlines our goals-based solution and the various data feeds that can be configured to meet your unique needs. Figure 2 Goals-based solution data diagram Page PureFacts Financial Solutions. All rights reserved.

11 2.2. State of the Industry - Summary Analysis The following table summarizes strategies deployed by various goals-based programs in place today at leading wealth management firms. More details on these industry strategies are available in Appendix B. Table 1 Methodology by Wealth Management Firm (See Appendix B for details) Company Define Implement Measure PureFacts All Criteria by Goal Any Number of Goals & Wealth Strategies Money Guide Pro Wells Fargo SEI Investment Betterment Merrill Lynch Define: Goals, Assets, Liabilities, Cash-flow Requirements, Retirement needs, Risk Tolerance, Asset Allocation Define: Goals, Assets, Liabilities, Cash-flow Requirements, Retirement needs, Risk Tolerance, Asset Allocation Manage Humans Bias & Behaviors, Priority, Time Horizon, Risk Tolerance Select Goal: Retirement, Safety Net, Major Purchase, General Investing Investment Personality Assessment & Define Goals Advisor Implementation Recommendation Advisor Implementation Recommendation Eight Goal-Based Portfolios Offered Limited Choices, Automatic Risk Calculation Refine Approach & Implement Goals Achievement Probability & Reporting Confidence of success based on Monte Carlo simulation Stress Testing Goals & Monitor vs Benchmarks Selected Goal-Based Portfolio vs Benchmarks Selected Goal-Based Portfolio vs Benchmarks Review Progress Summary Goals Based Wealth Management services are an excellent way to engage key investor audiences and create value through wealth advisor services, resulting in growth of your book and fee base. Clients will be more engaged, relationships will be stronger and trust will be greater. Moreover, wealth management firms can differentiate their unique value proposition and brand through goals-based services. To help visualize Goals Based Reporting, several examples are presented in Appendix A. Page 11

12 About PureFacts PureFacts Financial Solutions has provided world-class wealth management software solutions for 20 years. Our flexible and powerful tools enable wealth managers to be more productive and focus on client growth. We are a trusted partner to some of the largest financial organizations with a reputation built on expertise, innovation and giving our clients exactly what they need to do business their way. We regularly engage our clients to maintain our client-centric focus. This engagement enables us to exceed our client s expectations through the continuous innovation of our industry-leading platform of exclusive wealth management solutions. The PureWealth Enterprise Platform bridges the client facing duties of the wealth advisors with the operational discipline of the back office. The platform seamlessly integrates with portfolio management and custodial systems to provide users with a consolidated source of information that allows them to better serve their clients. Our goals are to help clients grow their business, gain more value from their cost structure, mitigate against operational risks and improve the client experience with their firm. Page PureFacts Financial Solutions. All rights reserved.

13 Appendix A: PureGoals Preliminary Mock Ups PureContact Client Relationship Management Figure 3 Wealth Advisor Goals Summary View Page 13

14 PurePortal Mobile Optimized Client Portal Figure 4 Goals-Based Investing Details Wealth Advisor View Page PureFacts Financial Solutions. All rights reserved.

15 Appendix B: Industry Perspectives on Goal Based In this section, we will review the goal based investment approach of financial institutions that have widely implemented goal based investing. We have found these processes to have many similarities. They all have similar methodologies define, implement and measure goals. The following sections will highlight some of the key differences between approaches. Wells Fargo Wells Fargo Advisors is a US firm with $340B in assets under management. Their goal based planning tool and process is called Envision. The high-level goal based strategy is based on the following 3 questions: Where are you now financially? Where do you want to go? How do you plan to get there? The Envision process consists of the following 8 steps: 1. Define major goals 2. Ideal & acceptable goals perfect world vs compromises that could be made 3. Prioritize goals ensure goals that are valued most are achieved 4. stress test goals determine how likely goals are to be achieved 5. Advisor recommendation Recommended scenario, potentially deemphasizing lower priority goals 6. Implement allocation investment mix based on risk tolerance, concerns, and financial circumstances 7. Monitor progress track versus a unique benchmark 8. New goals & priorities update Envision plan as necessary either because of changing life goals or because of fluctuating market conditions. The Envision plan requires the following inputs from their client to build the financial plan: Life Goals Education goals Assets Liabilities Cash-flow requirements Retirement planning needs Levels of acceptable investment risk Asset allocation objectives Life events The key differentiator of the Envision process is step 4 stress testing goals. Stress testing goals uses proprietary Monte Carlo simulations. These simulations provide a percentage of the confidence for a client to achieve the goal. There are three zones that the specific goal can fall in. The target zone of 75-90% confidence suggests the goal will be achieved. Above 90% confidence will jeopardize other goals or assume more risk than necessary. Below 75% will miss the goal. A 75% to 90% confidence zone puts the client in an optimal position to meet his or her goals without undue financial sacrifice or overexposure to risk. Page 15

16 SEI Investments SEI is a US company founded in 1968 with US$269B in assets under management. SEI is a provider of institutional and private client wealth management with a main office in the US and other offices located throughout the world including Canada. SEI uses goal based investing as a way to manage human biases and behaviours. Goals based investing prevents impulsive investor behavior that can undermine financial success and look beyond intermittent market volatility. Below list the most common investor behaviours and how SEI s goal-based investing approach helps to manage: Herding Imitate others because of the belief that they have superior knowledge that justifies their action. Goal-based investing avoids sway of public opinion; keep focused on what is important. Overconfidence Many investors overestimate their knowledge and skill, which can result in excessive trading and refusal to adjust views when presented with contradicting evidence. A clear goal and strategy to get there helps to remove these behaviours. Over and under reaction information largely irrelevant to goal can be distracting to investors. Clients focused on staying on track to their financial goals will be less affected and reactive to short term market fluctuations Myopic loss aversion emotional reaction to short term market volatility. SEI stability-focused strategies designed to limit maximum loss on portfolio Regret aversion avoid realizing losses resulting in missed opportunity. Managed strategies eliminate the investor help to eliminate investor s emotional attachment to their holdings. This helps clients to: Understand they are investing directly into their stated goals Learn to think about risk in terms of their specific goal instead of short term volatility Engage in a relationship explicitly designed to manage harmful behavioural tendencies SEI offers eight goals-based portfolios, these are divided into two main categories are stability focused and growth focused. Stability focused aim at wealth preservation. These consist of the following strategies short term, defensive, conservative and moderate. Growth focused aim at wealth accumulation. These consist of core market, market growth, aggressive and equity. The strategy chosen per goal is determined by the priority, time horizon and risk tolerance Betterment Betterment is an online investment manager (Robo-advisor) that manages more than $5B USD. They view goal-based investing as a personal application of asset-liability management and a framework for ensuring future expenditures are funded. Betterment has four categories of goals: Retirement Safety net Major purchase General investing Page PureFacts Financial Solutions. All rights reserved.

17 Each goal type has a different strategy and recommended allocation range and allocation glide path plan (based on the time horizon for each goal, risk is decreased as target date is approached). A retirement goal has 2 distinguishing characteristics; (1) it usually represents the largest future liability and (2) it consists of 2 phases- accumulation and decumulation. After the initial target date, the goal shifts to retirement income. It has a steady drawdown with dynamic withdrawal rate until the final target date. A safety net does not have a specific time horizon. The money may never be needed but if it is, a large portion may be needed at once. For this reason, the allocation for this is conservative. General investing goal is for flexible purpose and has no specific liquidation event. This can be used for long-term savings. A major purchase goal is a short to medium term goal where the risk decreases on annual basis. On the target date, the investment is fully liquidated. The glide path is more conservative than the retirement goal because of the need to fully liquidate investments on the target date. Merrill Lynch Merrill Lynch s goal based platform is called Goal-based wealth management (GBWM) and consists of a 5 step process: 1. Investment personality assessment 2. Define goals 3. Determine and refine approach 4. Implement goal based solution 5. Review progress The investment personality assessment helps to define the investor s mindset towards risk, preferred approach to investing and overall purpose for investing. Mindset Confidence in future of the market Adoptability to changing market Experience with investing Approach Accessibility of assets Protection against downturn Activity level in investment process Purpose Self-such as essential spending Family such as education funding and estate planning Community such as charitable giving Page 17

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20 Contact our team to implement goals-based services that enable your unique strategy. Geordie Distelmeyer Goals-Based Wealth Management Lead Phone: x288 You build wealth. We build solutions. 372 Bay Street, Suite 1703 Toronto, ON M5H 2W9 Office: PureFacts Financial Solutions. All rights reserved.