Extending the Goals-Based Framework to Comprise Both Investment and Financial Planning

Abstract

This article seeks to fill a void in the literature on goals-based planning. Most of the current work covers cases where clients already possess significant financial assets that they plan on totally or partially spending down, through expenses as well as various dynastic or philanthropic transfers. Yet, planners—be they focused on income/savings/expense management issues or conduct their work in the asset management sphere—have to deal with at least two other potential cases. Our analysis suggests that the goals-based planning approach has the potential to inject more texture into conversations with all clients. It also shows that there are significant, and at times even dramatic, differences in the ways one might deal with 1) an individual who is already wealthy and spending down his or her wealth, 2) another who may be wealthy, but has unrealized non-financial wealth and ongoing current savings inflows, and 3) yet another who has a significant income and savings power but not enough accumulated financial wealth to live on. This is nothing more than the classical case of the difference between human and financial capital. Individuals in an asset decumulation mode have more financial than human capital, while those who are in an accumulation mode have more human than financial capital. As one might expect, this describes a full spectrum, and our “accumulation/decumulation case” falls somewhere between these extremes.

TOPIC: Wealth management

Key Findings

• • Goals-based wealth planning is the discipline most likely to help individuals and families achieve their goals, over the desired time horizons and with the desired sense of urgency or required probability of success and combines elements of both investment and financial planning.

• • There are three different personal finance scenarios that must be considered, rather than the sole wealth decumulation case usually considered. People still accumulating wealth also need help, whether they already have meaningful financial savings or are only starting to build them.

• • Though each scenario requires some change to the well-documented asset decumulation approach, they all benefit from the fact that discount rates used to evaluate future goals are both time-horizon and required-success-probability adjusted.

• • This approach may allow the creation of a completely new fee paradigm where advisory fees are based not on assets under advice, but on measured progress toward the client’s goals.