Goals-Based Investing: Why It Matters to You and Your Business
June 22, 2022
3-5 minutes reading time
With the knowledge of the universe at their fingertips, today’s investors are more empowered than ever before. When there’s an ocean of products to choose from, the greatest value proposition we can offer to customers is to simply give them what they want.
Financial services is no exception. An industry that, in the early days, was dominated by aggressive peddling of cookie-cutter products, is starting to shift to one of personalized and user-friendly experiences. Particularly in the wealth management space, we are seeing increasing adoption of goals-based approaches to managing investors' assets. As more non-traditional players - such as fintechs and other digital platforms make a splash into the market - goals-based investing is a critical feature to help improve investor experience and maximize investment value.
What is Goals-Based Investing?
Like anything else we endeavor in life, investing must be done with intention and purpose - it is not one-size-fits-all.
Throughout the course of an individual’s lifetime there are often multiple financial milestones. Whether its retirement, child’s education, or home purchase, each milestone, or goal, translates to a distinct investment objective. Understanding an investor’s goals helps unlock their intent, desired risk and return, as well as other important considerations such as values (e.g. environmental or social issues).
Goals-based investing is different from conventional investing approaches that typically measure progress solely against market benchmarks. Goals-based investing shifts the focus away from the markets and back to the individual investor by measuring savings and investments progress relative to stated goals. Measuring based on goals rather than market benchmarks allows investors to keep their longer-term goals in mind and shift attention away from whatever may be happening with markets in the short-run. Investing is not just about beating benchmarks, it's about achieving financial goals.
Each financial goal typically has different risk and return requirements depending on the time horizon and the investor’s risk propensity for that goal. For example, a retirement goal generally focuses on long term investments (greater than 10 years) and as a result, is less affected by short term market fluctuations. Conversely, if an investor wants to purchase a house in the next two years, their portfolio will need to be protected against short-term market conditions. Below is an example of what a typical portfolio might look like for an investor versus how it would be impacted by goals.
OneVest’s Goals-Based Investing
OneVest empowers enterprise partners using our Embedded Wealth Platform to offer a goals-based experience through OneVest’s embedded API, widgets, or white-labelled applications. Our partners’ product and advisor teams can curate the investor’s investment products, applications and conversations around those goals.
OneVest provides goals-based investing offerings through powerful technical capabilities. This includes the ability for investors to set up a goal and track a variety of information associated with the goals. Investors can then have a many-to-many relationship between goals and account types (TFSA, RRSP, cash, etc). Consider the following examples:
1 goal managed across multiple accounts
Multiple goals across 1 account
These examples show the flexibility that OneVest provides by enabling investors to have more than one investment account per objective.
At OneVest, we believe no goal is too small. There, we provide fractional share capabilities which allow investors to start investing and contribute to goals with as little as $1, making it easy to save for a goal. Using these features, OneVest can empower enterprise partners to deliver cutting edge goals-based offerings.
Benefits of Goals-Based Investing
Employing a goals-based investing approach not only benefits investors, but also brings significant competitive advantages to enterprises.
Partners using OneVest’s WaaS platform can reap the benefits from goals-based investing:
- Enables you to provide a better offering by tying into other financial products - Understanding an investor’s goals enables better recommendations. This allows partners to pull users into other financial services products rather than push them. For example, a down payment goal can easily tie into offering a mortgage.
- Provides enhanced Know Your Customer (KYC) - goals are a holistic way of assessing needs, which enables you to better serve your investors and ensure that you are meeting regulatory requirements. Understanding why an investor is investing paints a much more thorough picture.
- Improves investor engagement and retention as investments are aligned to the investor journey - when you speak to investors about their objectives and timelines in ways they understand, you are able to provide advice, products, and an overall value proposition that actually aligns with what they need. An investor that understands why they’re investing, and why they have chosen your firm/product, is likely to stay with you for the long-term.
There are many advantages for investors to use goals-based investing. They are:
- Investments are aligned to the investor’s life journey - this approach focuses on tailoring investing behavior to pivotal moments. As a result, portfolios focus on optimizing the risk and return for a specific milestone which aim to help the investor successfully achieve their goal.
- Understanding an investor’s goals helps them take the appropriate amount of risk - Much of modern-day investment management has roots going back to Modern Portfolio Theory, which states that risk and return are positively correlated, and that achieving a certain level of return first requires understanding the level of risk taken. One mistake we often see new DIY investors make is simply dumping their money into familiar/popular assets, such as stocks or crypto. A 100% stock portfolio might be suitable for someone saving for retirement in 30 years, but likely not for someone who’s looking to buy a house in the next year. Risk reflects short-term uncertainty, and investors who don’t have their portfolios aligned to their goals would have lost 20-30% of their purchasing power this year, for example, given what’s happened in the market.
- Goals are agnostic of the financial instruments - To maximize return, investor’s need to ensure they use the right financial vehicles to maximize gain and minimize taxes. Too often, investors unknowingly leave money on the table when they do not take advantage of government provided tax benefits. For example a Registered Retirement Savings account might be contributed to first in order to shelter one’s profits from taxes, as well as to reduce taxable income. By taking a goals-first approach, investors can holistically benefit from a combination of the right financial products, account types, and various other financial planning tools and strategies.
- Goals can be forecasted and planned - Financial products can work together to achieve a goal. For example, purchasing a house requires savings, then a mortgage, then eventually home insurance. By structuring around goals, advisors and tools can help investors more efficiently achieve their goals through a synergy of multiple financial services.
- Achieving goals is immensely fulfilling - tracking and watching a goal become completed provides a rewarding feeling and enables a good retention method for partners.
Goals-based investing has benefits to both enterprise partners and your investors. It helps investors to have a more personalized, valuable experience and enables enterprise partners to provide a more refined offering, which increases investor engagement, share of wallet, and enhances investor lifetime value (LTV).
If you’re interested in learning more about how OneVest can help you and your investors benefit from goals-based investing, reach out to us at firstname.lastname@example.org.