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The power of purpose: Benefits of goals-based investing

Consider the followings ways in which having deeper conversations about client goals might make your job easier and improve your clients' behavior

Apr 10, 2014 @ 8:40 am

By Daniel Crosby

Much of behavioral finance's departure from traditional financial models centers around the respective approaches' vision of what constitutes “rational” behavior. Traditional approaches take a simple, objective approach — rational behavior is all about optimizing returns. Through a behavioral lens, rationality takes on a more subjective lens and could be construed as making decisions consistent with personal financial goals. The behavioral approach is constructivist in that the client sets the parameters for rationality through the articulation of personal goals. But by drawing out the financial goals of their clients, advisers do more than simply highlight a finish line, they actually catalyze a positive behavioral chain reaction.

READ MORE about how goals-based planning is taking flight

Consider the followings ways in which having deeper conversations about client goals might make your job easier and improve your clients' behavior:

PURPOSE INCREASES INFLUENCE

The reasons why successful advisers are highly compensated and most trainees burn out within a few years are one in the same: selling is difficult. All too often, advisers are selling the wrong thing, focusing on the “what?” instead of the “why?” In his excellent TED talk, Simon Sinek suggested that most uninspired business transactions deal with the particulars of a product or service rather than the underlying motivation.

Mr. Sinek said that the most successful companies lead with their purpose and let that drive the particulars. Using the example of Apple, he speaks to their transition into making phones and MP3 players, not necessarily the bailiwick of a computer manufacturer. However, inasmuch as it is consistent with Apple's overarching “why” of challenging the status quo and creating beautiful products, it makes sense. Rather than providing your clients with a laundry list of your services, help them understand how your efforts will help them reach their “why.” As Mr. Sinek said, “People don't buy what you do, they buy why you do it.”

MEANING BRINGS CLARITY

One of the reasons why people fail to save in the now is that it is construed as a loss. In an environment where expensive trinkets can tempt us with each click of the mouse, it can be difficult to put off for a rainy day what could provide more immediate pleasure. Once again, a goals-based approach can help.

READ MORE about the investing industry at a crossroads

Stephen Covey, of "Seven Habits" fame, said it best when he said, “You have to decide what your highest priorities are and have the courage — pleasantly, smilingly, nonapologetically — to say 'no' to to other things. And the way you do that is by having a bigger 'yes' burning inside. How different our lives are when we really know what is deeply important to us, and, keeping that picture in mind, we manage ourselves each day to be and do what really matters most.” The future can seem abstract. We know we need to save for some distant date, but the picture we have of the future tends to lack color, which can making saving a burden. By articulating a series of future meaningful goals, advisers can ensure that their clients have this larger “yes” burning inside.

GOALS PROVIDE COMFORT IN HARD TIMES

Viktor Frankl, the Austrian psychiatrist and Holocaust survivor, has written beautifully about the power of purpose in his classic, “Man's Search for Meaning.” Hr noticed early on that much of what differentiated hope from a failure to thrive among prisoners was a connection to something bigger than the here and now. For those rooted in the horror of the present, it was exceedingly easy to find reasons to despair. But for those able to look forward to something more, their pain was couched in terms of aiding their long-term goals, which provided them some succor.

While I am in no way trying to draw a straight line between Mr. Frankl's experience and that of a worried investor in a time of market panic, the truth remains that focusing on purpose has a calming effect. Rather than being swept up in the pain of the moment, goals-based investors are better able to understand that they are enduring a momentary discomfort on the path to achieving the things that matter most to them. As Nietzsche said, “He has a why to live can bear with almost any how.” Are your clients sufficiently tuned in to their personal North Star to aid them when times get rough?

If behavioral finance has taught us anything, I hope it is that true wealth is more about a life well lived than achieving a particular rate of return. In a single act, advisers can improve relationships with their clients, excited them about the investment process and provide them with a buffer against hard times. Why not?

Daniel Crosby is a behavioral finance expert who works with organizations to develop products and messaging to maximize positive investment outcomes. Among his current collaborations is "Personal Benchmark," a system of embedded behavioral finance delivered by Brinker Capital.

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