Goals-based investing is now a norm for many online automated investment platforms, but the real success driver will be in linking investing and
financial planning in a seamless manner.
As it stands, many — but not all — robo-advisers use some form of a model to help clients invest toward goals, whether that be saving for college, trips, a new home or retirement. This method moves away from the traditional risk-based or benchmark-beating ways of investing, and measures progress through reaching goals.
Will Trout, a senior analyst with Celent's wealth management unit, said the industry already has seen a number of robos using goals-based planning, and now these platforms have to figure out how to link real-time investing and
financial planning.
"You should be able to have a dynamic relationship between
portfolio management and
financial planning," Mr. Trout said. "Rather than cumbersome or unwieldy, it should be done practically instantaneously … that is where the next generation of robo-advisers is going to go."
Cerulli recently came out with research that stated platform
consolidation is pushing more advisers to provide goals-based planning. Robos must use goals-based planning to be successful considering their usual passive investing models, said Tom O'Shea, associate director at Cerulli Associates Inc.
"Since most of them don't believe in active management, they don't propose to beat the benchmarks," Mr. O'Shea said. "How do they manage success? Saving for retirement, saving for kid's education, you name it."
BETTERMENT
Betterment is one example of a robo adviser getting closer to doing this, he said. The platform recently announced it was
using account aggregation to show clients and advisers using Betterment Institutional, the adviser-facing side of the platform, their full financial pictures with external accounts including savings and checking accounts, credit cards and mortgages.
Dan Egan, director of behavioral finance and investments at Betterment, said goals-based investing makes clients better investors. "When you are planning and focusing on your goals that means you're not focused on what did the markets do last week," he said.
A
CEB study from 2014 found that 35% of high net worth individuals judged the success of their portfolios on financial and life goals, compared with 23% of those who compare it to financial market performance and benchmarks.
Erik Jepson, chief customer officer at Advisor Software, a financial technology company that offers open architecture features, said most of the platforms his company works with are using goals-based planning. The ones that are not may be avoiding it because it's easier to have a risk-based approach.
"It is easier to justify to a regulator in the event of some sort of legal matter why they put a client in a specific portfolio than with goals-based," Mr. Jepson said. "While I understand it, I think a goals-based approach almost always leads to a better outcome."
His company, which recently launched a robo-adviser platform called ASI Digital Advisor, has been working for 10 years on providing a solid relationship between investment advice and financial planning, which will be based on household goals and analytical research.
TradeKing Advisors, a robo-adviser that started two years ago, began with a risk-based investing model, but has since incorporated a goals-based approach.
"We prefer to see both and meld the two together," said Brent Jones, product manager with TradeKing Advisors. This allows the platform to balance a client's goals and how they should be invested based on those goals with their risk tolerance threshold.
"If you are a young person, say 25, and saving for retirement, in the long run you will be better off with 100% stock portfolio — that will give you the best returns — but that is not something everyone can handle," Mr. Jones said. "I wouldn't be able to handle the extreme fluctuations all stocks would provide, even if the math would probably work in my favor."
