Goals-Based Investing

One of the biggest problems with the way many financial firms operate is that they prescribe before they diagnose. They first create a product or portfolio and then try to convince people to invest in it. They try to make a sale without first gaining an understanding of their potential client’s circumstances. It’s completely backwards.

A number of years ago, the investment office I worked for took a meeting with a large, well-known consultant as a favor. We never planned on using this company’s consulting services but thought it wouldn’t hurt to take the meeting to see how they viewed the world. The firm didn’t really understand this dynamic and came into the meeting with guns blazing. They had a huge team with a well-rehearsed pitch they used to try and impress us.

The head of the firm wasted no time going into his presentation along with some name-dropping of their current client base. He immediately outlined his firm’s current investment views, which went something like this:

First of all, you need to have at least 15% of your portfolio invested in timber. And if you’re not overweight in middle market mezzanine private equity funds and underweight large market LBOs you’re going to be out of luck over the next decade. Who are your hedge fund managers? We have access to the best long/short manager in the business right now. How long will it take you to shift your portfolio to our platform?

We were immediately taken aback by the presumptuous nature of this pitch. Not only was this firm extremely overconfident in their outlook and abilities, but they never once asked us a single question about our organization before diving into their song and dance.

They didn’t ask about the mission of our organization or what the goals of the fund were.

They never asked what type of liquidity constraints we were under.

They failed to try to gain a sense of our risk profile and time horizon.

They never asked what our stated return goals and assumptions were.

Needless to say, the meeting didn’t last long. However, you can’t blame every financial firm when this type of thing happens. They don’t have time to vet every single investor in their products and hold their hands through the entire process.

But when you’re talking about advisors or consultants, who are providing a service to their clients, then they absolutely have to focus the majority of their time and energy on the client’s needs. Financial services should not be a commodity business. It has to be personal for both parties to succeed.

The problem is that many clients want to be wined and dined. They want someone to tell them exactly what they want to hear, even if it’s an impossible strategy with unrealistic underlying assumptions. Wall Street is not the lone culprit in this game. After all, the consultant in my story had a very large book of business. There were multi-billion dollar funds that they worked with. Someone was eating up what they were putting out there.

My feeling has always been if you’re not approaching the investment process from a goals-based perspective it’s going to be very difficult to ensure long-term success in the markets. Here are a few things I’ve learned over the years when it comes to goals-based investing:

  • An investment firm can have the perfect pitch, investment structure, fund or opportunity. In many cases, it may not matter if it doesn’t fit within the client’s stated investment policy. Just because there’s a potential for a good investment doesn’t mean it’s the right fit for every client. The markets are always tempting us with new products, risks, and opportunities. This is how individuals and organizations end up investing in strategies they don’t understand or have no business performing due diligence on in the first place.
  • One of the reasons certain investors constantly change up their investment strategy — usually at the worst possible moment — is because they don’t have the right benchmarks in place to begin with. Many don’t even know how to define whether they’re on track or not. Without a deep understanding of your goals from the start there’s no way to judge your investments going forward. After all, achieving your goals is the whole point of investing your money in the first place.
  • It’s perfectly acceptable to admit that your goals can and will change over time. We’re all dealing with an uncertain future. No one knows how life is going to turn out. This is why the process of planning is so important. It allows you to continually work through the new challenges that may arrive in the context of your stated plan.
  • It’s much easier to believe in certainty than process, but the right process can lead to much better outcomes in the end.

Further Reading:
Complexity As a Default

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  1. 10 Friday AM Reads | The Big Picture commented on Oct 23

    […] $3 Trillion ETF ‘Boom’ (CIO) • Goals-Based Institutional Investing (Wealth of Common Sense) • A Timeline of Some of The Best Investment Books (Irrelevant Investor) • Most Earth-like […]

  2. Robb Engen commented on Oct 23

    I was meeting with a co-worker when her watch rang(?) and on the other end was her financial advisor who wanted her and her husband to attend a wine and cheese event where they would hear the banks’ global heads of fixed income and equities talk about the direction of the market. After she agreed to go (and hung up her watch-phone(!?!) I laughed and said it was nice of the bank to bring their fortune-tellers along for a presentation. I’m sure these presentations are very impressive and are made to look like your bank or advisor has access to information that you don’t, but it’s all a big show and the information is probably next to worthless for the average investor.

    Thanks for the mention!

    • John Richards commented on Oct 23

      I’ve been to one of these before – it was really an opportunity for a guy who works in the field show off some pretty charts about real estate in Europe and GDP in China etc – pretty funny (and I got a free meal out of it, so I was entertained AND fed.) We were all supposed to be wowed by his awesome markets knowledge, and while I’m sure he knew plenty, most people there probably had little idea how unrelated his pitch was to any investing results they might personally see. The organizer was a business contact of my wife’s, so I decided to just eat my steak and not ask embarrassing questions.

      • Ben commented on Oct 23

        That’s one of the biggest problems with these pitches — they don’t explain it well enough for people to know if it’s relevant for their situation. I think the hope it that they’ll just hand over th money because they’re so impressed.

    • Ben commented on Oct 23

      See, you proved my point about wanting to be wined and dined. I’m assuming there were plenty of product pushed at that event (not that there’s anything wrong with that).

  3. ST commented on Oct 23

    Ben, one of the more important articles you’ve penned. Everyone involved in the investing process — client and advisor alike — needs to read this several times.

    The problem arises when the future goals of the client are over-run by the immediate goals of the advisor.

    You can’t really have an unscrupulous client, but there are many incentive-driven advisors who will sell anything to anyone (in any manner possible) in order to secure their job.

    Buying the investment should be the last 1% of the process; the other 99% should be focused on the discovery and structuring of the client’s goals.

    If I was an institution, I’d give my money to Ben! 🙂

    • Ben commented on Oct 23

      Ha, thanks. That’s a good point. Figuring out any conflicts of interest or career risk is one of the most important jobs of a good client.

  4. Mark Zoril commented on Oct 23

    Reminds of a story when I worked at a large broker dealer. Happened about 5 years ago. At a large company gathering, they rolled out a new product. Essentially a wrap of 1% for dynamic management on top of the already overpriced products. What was ridiculous about it, though, was that they presented it as though this was what all our clients were asking for. They had done all this research and this is what the market wanted, etc… Nonsense. I had never heard any of my clients ask for this. It gets worse though! This new product, which apparently is what our clients were telling us they wanted, was only to be used when our clients transferred “new” money to the company. What complete and total BS.

    So, they invented a product that cost virtually nothing, sold it for 1% based upon the premise that our clients want it, and would only allow it for new money.

    • ST commented on Oct 23

      Mark — how did you deal morally, ethically, ect., continuing to work with product and people you knew to be “complete and total BS”?

      I think it’s difficult in the financial sector (moreso than most other occupations) to find a firm where 100% of the people are doing the right thing 100% of the time.

      • Mark Zoril commented on Oct 23

        Most advisers rationalize it any way they want to. I provide great service, my clients would be worse off without me, etc. However, I didn’t really end up dealing with it all that well – so I quit and started my own firm. I was there for a long time, longer than I should have been there, but was ready to leave. I have made many mistakes in the transition, but we are now getting more traction at what we do. It is so much different in approach and philosophy. I am very liberated and see myself working well into my ’80’s if I am fortunate enough to maintain my health.

        In my experience, for most advisers, they generally don’t have too many issues with the products, tactics, etc. It is what they do and how they help people. It is their career. They like their clients, etc..

        Also, in my situation, I was a bit unique at my firm in how my business model was set-up. I could meet my company established objectives and avoid selling many of the extremely crappy products. See – there I go – I am rationalizing what I did…

    • Ben commented on Oct 23

      Wall Street is very good at creating a bunch of product and throwing them against the wall. Some make it, others are quietly shut down. Here’s one a wrote a while ago on the number of funds that are new or shut down every year:


    • John Richards commented on Oct 26

      Yeah wow. My first financial advisor (and last) was provided as a contact through my company. We were put in an account with a 1% wrap and ridiculous loads. In some ways, they were up front about it, but we were young and didn’t know better. The advisor also tried to put us in a variable universal life product. I bought a book by a guy who claimed to have invented these things, and it scared me to death. We said no, thankfully. I then decided I better learn this stuff for myself. Three issues in one experience: inappropriate products (VUL), bad asset allocation (no tax optimization between tax-advantaged and regular accounts), & just plain bad products.

      • Mark Zoril commented on Oct 26

        Sounds about right, John! Most advisers and broker/dealers view an employer-based retirement plan as an excellent lead generation system. It’s really pretty awful. They get access to the employees by providing guidance on the retirement plan and then introduce their various products and investment services.

  5. Scott Boone commented on Oct 23

    This reminds me of a comparison that I often repeated to the professionals whom I worked with: our job is to be our clients’ financial “doctor” and a key part of what we do is to ask our clients to describe their financial “symptoms.” The point, of course, was to get our people to ask questions and then listen before they opened their mouths and started telling a client what they should do.

    • Ben commented on Oct 23

      Nice. Here’s a good quote from Meir Statman that plays on this theme:

      Good financial advisors are good financial physicians. Good advisors possess the knowledge of finance, as good physicians possess knowledge of medicine, and good advisors add to it the skills of good physicians: asking, listening, empathizing, educating and prescribing.

  6. Mark Massey commented on Oct 23

    Once the client trusts the broker/dealer and its agent, their advisor, 90% of them will do whatever the advisor says…Sometimes because they do not what to look like they do not understand and other times because the easier path is to just say yes. I would get out of this industry if my clients ever feel that way. They likely will not because I NEVER invest them in PE, hedge funds, long/short funds, annuities, or anything considered to be “alternatives”. It’s individual equities and cash now. When the market gives me value in fixed income, my clients’ portfolios will ease into bond funds. Simple is best for most but so many seem to want the complex until I explain what they have to pay for “complex”.

  7. Jim Haygood commented on Oct 23

    While institutions receive pitches for complex junk, individuals who still depend on the old commission-based broker-dealer model for advice get stuck with simple junk.

    Such as the unit trust I came across today in a widow’s account. It carries a 2.95% sales load, for an easily-replicated fund with 25 equally-weighted large cap stocks. Not only that, but with a life of just 15 months, it allows the broker to whack the client with the 2.95% sales load year after year. KACHING!

    Junk products like this one remind me of just how sleazy Wall Street actually is.

    • Ben commented on Oct 24

      Good point. In most professional circles you’re probably arguing over basis points (unless we’re dicsussing alts), but with individuals, many are getting completely gougded.