Goals-based investing can calm clients

By Melissa Shin | October 24, 2014 | Last updated on November 8, 2023
3 min read

During uncertain markets, remind clients they’re investing to meet a goal, not a desired return.

That should help allay fears, says David Zierath, an investment strategist with SEI. When clients know they’re on track, they tend to stay invested, regardless of market conditions.

Read: Canada warms to goals-based investing

For clients with short-term capital preservation goals, Zierath suggests managing their portfolios to a maximum drawdown, rather than shooting for a certain return. That way, they’ll know their losses will be limited.

For a portfolio with a maximum 10% drawdown, he designs it to earn 4% return in a normal market, using traditional asset classes. If markets start falling, “we would take out some equities, high-yield bonds and emerging market debt.”

Read: Panicked clients? Here’s help

If the portfolio loses about 8.5%, “we would take a step back and say, ‘What would this look like if we reconstructed the portfolio so it had a maximum 1.5% drawdown?’” In this case, Zierath says, it’s likely that only cash and short-term government bonds would be left.

As an example, he says in 2008, “we started taking out equities in March [of that year]. By summer we’d taken out credit fixed income, and by March 2009, we’d already made all our changes.”

Read: Keep clients happy with concrete goals

Zierath says conservative clients could also consider allocations to managed volatility funds. That way, they get “a little bit of equity flavour,” but only a portion of the market’s volatility (in his funds’ case, 70%).

In such funds, “our managers run screens on companies with lower standard deviation, lower drawdown, higher earnings and lower beta.” Such companies tend to be in safety-oriented sectors like consumer staples, utilities and healthcare. “We look for deeper patents or [cash-heavy] balance sheets.”

These managed volatility funds contain long-only equities. “We want to keep [our strategy] efficient and simple,” he says. “If we don’t need to use derivatives, why use them? They’re more complicated for advisors to understand, and more complicated to explain to clients.”

A better discovery process

For goals-based investing to work, the objectives must be spot on, says Zierath. So, he suggests asking clients to group their goals into four categories:

  • things they need now (e.g., to care for a special needs child);
  • things they want now (e.g., a vacation every year);
  • things they need later (e.g., income replacement in retirement); and
  • things they want later (e.g., to give away money to charity).

In client meetings, he’s seen advisors use a magnetic board that plots each category in a quadrant. The board comes with 60 magnets, each of which display goals such as “learn more about investing” and “buy a house.” Advisors then ask clients to arrange the magnets in the quandrants.

“This forces buy-in from the client,” says Zierath.

Then, the advisor would invest “things they need now” money in a capital preservation portfolio, while “things they want later” money goes into a growth-focused portfolio.

Read: Know clients better to build your book

Zierath says that while clients may expect the path to a goal to be linear, advisors should emphasize that it usually isn’t.

“When I worked in SEI’s family office, whenever I sat with clients I always knew that year to year, clients were always off the progress toward their goals, because you’d have to plot goals on a straight line. Clients were usually over or under, but never spot on.”

He suggests advisors tell clients they could deviate from the path by as much as 10% to 20%, but to tailor that range for the client’s circumstances, because “we don’t want clients to get spooked and demand changes when markets are down 10%.”

And Zierath isn’t panicking. “We’re not derailed on our current market outlook,” he says. “Markets need to take a breather, and we’ve been saying that for four to five quarters.”

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Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.