Practice Management
Successfully implementing goals-based planning
Michelle Black
Solutions Portfolio Manager
  • Behavioral finance has demonstrated that goals-based planning aligns better with the way clients think about their money and can help them better guide their investment decisions.
  • Goals-based planning helps illustrate the areas where you provide the most value to clients and strengthens client relationships.
  • Having clients classify their goals as essentials, enhancers or endowments helps them prioritize their goals and allows them to play an integral part in defining how they will measure their investment success.
  • Implementing true goals-based planning should involve changing how you construct and manage portfolios, as well as how you communicate with clients.

In recent years, goals-based planning (GBP) has been much discussed in the wealth management industry. In fact, it has almost reached “buzz-word” status in some circles. This is largely a result of investors’ shifting needs and expectations. More and more baby boomers are retiring and focusing on sustaining their portfolio in the distribution phase, and their needs are different from those in the accumulation phase looking to grow their assets. Clients are becoming more demanding and want to understand the value of the advice they receive. This shifts the focus of discussions to client outcomes rather than benchmarks.

Work in behavioral finance suggests that investors see their portfolios not as a whole, but as layers in a pyramid, each with different goals and objectives and each with a different attitude toward risk. GBP helps keep investors focused on what their investments are intended to accomplish, and helps prevent them falling victim to emotions and cognitive biases like anchoring and availability bias.

At Capital Group, we believe advisors should approach GBP in a way that is meaningfully different from a traditional approach to planning. Rather than being just a shift in how an advisor talks about the planning process with clients, true GBP should have meaningful implications for how client relationships are managed and how portfolios are constructed and monitored to improve the probability of achieving better outcomes.

This puts you, as an advisor, in a stronger position to illustrate your value in helping clients meet their goals — and helps you avoid being judged purely on performance. Having helped numerous advisors implement GBP, I know that moving from a traditional wealth-planning method to a goals-based approach can be a significant shift in mind-set and processes. Based on this experience, I have identified several key factors that advisors should consider when implementing GBP with their clients.

Setting and prioritizing goals

A true GBP approach analyzes clients’ goals in a balance-sheet framework, similar to how large institutions manage pension funds. Here, an individual’s goals can be considered liabilities, and the key measure of risk is not volatility, but instead, it is the probability of shortfall in meeting those liabilities. This requires you and your clients to take a more rigorous approach to setting and prioritizing goals relative to one another, and scaling the importance of meeting each.

To help clients think about the hierarchy of their objectives, we use a framework with three categories:


  1. Essentials: Essentials refer to absolute necessities, such as living expenses and medical care, that clients want to be highly certain they’re going to achieve. We recommend assigning a 90% level of confidence to these goals.
  2. Enhancers: Enhancers are those things clients would like to accomplish financially, but could technically do without, such as annual winter stays in a tropical climate. Here, clients are willing to accept a lower level of certainty and recognize that there is a greater risk of shortfall. A 75% level of confidence is typically appropriate for these goals.
  3. Endowments: Endowments are “aspirational” desires, such as leaving a lump sum to charity or an inheritance to children. Clients are typically willing to accept the lowest level of confidence for these objectives. In fact, we suggest that a 50% level of confidence is sufficient. Often, these are goals that would occur at or near the end of the client’s life, though the advisor should be attentive to the possibility that they are desired sooner.

Let’s consider the example of a client whose goal is to retire by age 65 with a portfolio that can support $300,000 in after-tax spending annually for 20 years. If the client can only afford $250,000, is that technically a “failure”? We would argue that it depends on whether the client was willing to accept some degree of risk of falling short of that goal. This approach to GBP lets you calibrate what level of shortfall risk is acceptable and what is not.

Once the goals are clearly defined, the next step is to calculate the present value of the amount needed to fund each goal. The discount rate applied to the dollar value needed to accomplish each goal is tied to the asset allocation and the advisor’s capital market assumptions. The type of goal (essential, enhancer or endowment) and the corresponding confidence level associated with that category will drive the return and the discount rate used. For example, assume your client has an “essential” goal in year 10 of $500,000 that they want to meet with a 90% level of confidence. Applying your capital market assumptions, the year 10 portfolio return might be calculated as 3% in the 10th percentile. The resulting cost of this essential goal would be roughly $372,000, the suggested current funding amount. 

Reviewing the client’s total balance sheet

Finally, you can compare the present value of the client’s future goals to the available resources discounted by current interest rates — this includes not only the current portfolio, but also their “human capital,” including future savings and expected retirement and Social Security benefits. By dividing their resources by the cost of their goals, you can determine the client’s “funded status,” or what portion of the present-value cost of the goals can be funded by the client’s available resources. If the client has a net deficit, several options can be considered, such as reprioritizing the goals, increasing contributions/savings, scaling back the goal or accepting a lower level of confidence. If there is a net surplus, you have the opportunity to help the client evaluate how it might be best utilized — for example, as a gift to family or charity, to fund a new venture or simply as an extra “cushion” to enhance financial safety and security. 

GBP also has portfolio construction implications, as it helps determine a client’s risk capacity. This is where the art and the science come together. The ideal asset allocation minimizes the probability of shortfall in meeting the client’s goals over the desired time horizon. If the desired confidence level is 90%, it’s necessary to minimize the threat of an untimely market downturn that might jeopardize attainment of that goal. Thus, it would require a more conservative allocation. If a goal requires only a 50% confidence level over the same time frame, by contrast, one can take on greater market risk in the pursuit of higher returns. By definition, it also means accepting the possibility of falling short of reaching the specific target.

You will notice that when using this approach, the portfolio with the highest discount rate corresponding to the desired confidence level would be preferred. Thus, we have to look beyond the mean expected return and consider volatility. More often than not, clients will have more than one goal, and each goal will have a different required confidence level, time horizon, funding amount and recommended allocation. The client’s overall portfolio typically reflects the “roll up” of all of the recommended allocations associated with each incremental goal.

We have found that the most productive meetings with clients occur when the advisor has the ability to demonstrate “live” how various choices affect the probability of reaching the clients’ goals. This helps clients see the impact of increasing their resources or lowering their “liabilities.” This also helps clients think about these changes at a tangible level and drives clients to action.

Building and monitoring portfolios

One of the questions that commonly arises with GBP is whether advisors should build one master portfolio covering all of a client’s goals or build individual portfolios for each specific goal. Both approaches have pros and cons in terms of logistics, cost and client engagement. When deciding which approach you will use, the two biggest factors to consider are the capabilities of your investment platform and the fees associated with managing accounts.

However you design your program, it is helpful to begin all your discussions with clients by restating their goals and tying them back to an asset allocation designed for that particular objective. Consequently, clients will be less likely to focus on standard deviation or a portfolio’s performance relative to benchmarks. By focusing on progress toward supporting objectives, you are less likely to be caught in the “performance trap” — the risk of your being judged strictly on the relative performance of your clients’ portfolios.

One of the most valuable aspects of our approach to GBP is that it helps you guide clients through potentially difficult conversations in periods when markets are volatile. Using this approach allows you to show clients whether they are still on track to reach their goals and reduces the chances that emotions will derail clients from their long-term strategy.

Effective implementation

Our GBP approach has proven to be highly effective with advisors. But implementing it requires effort, from you and your clients. You need to put in the work on the front end to guide clients through the process clearly and to fully articulate their goals. On their part, clients need to put considerable thought into defining and prioritizing their goals.

Clearly, implementing GBP isn’t as simple as just saying that you are focused on helping clients reach their goals. Effectively practicing GBP requires making meaningful changes to how you engage with clients and how you construct and manage portfolios. Yet, in the long run, both you and your clients can benefit from GBP. You can increase your clients’ chances of reaching their goals and give them more clarity about their progress. By doing so, you will become indispensable to your clients as they chart their course toward their future.

Michelle Black is a solutions portfolio manager with 29 years of investment industry experience (as of 12/31/2023). She holds a bachelor’s in business administration from the University of Southern California. She also holds the Certified Investment Management Analyst® and Certified Private Wealth Advisor® designations, is a member of the Investments & Wealth Institute and serves on the CIMA commission.

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