A considerable disconnect remains between what clients need and what advisors are offering them. Despite a growing body of literature and evidence on the merits of advising beyond portfolio management through strategies like holistic planning and behavioral guidance, most advisors are still not taking heed.
Financial Planning for Long-Term Goals
To bridge that gap, Michael Finke, dean and chief academic officer at the American College of Financial Services, champions goal-based financial planning. Ths is centered around the idea that all wealth management should begin with the end objective, Finke argues goal-based planning represents a logical progression of the advisory business given market conditions and mounting pressure from technology entrants. (For more, see: How to Be a Top Financial Advisor.)
“Oftentimes when people go see a financial advisor, what happens is they hand over their assets and the advisor puts together an efficient portfolio, one that maximizes the amount of return for a given level of risk over an annual or quarterly horizon,” Finke explains. “But that’s not really what people are looking for.”
Instead, clients want answers regarding their financial future and how to maximize their assets to meet specific goals.
Retirement is a good example, Finke says. For clients who go to their advisor for the first time seeking help with retirement planning, they are not interested in portfolio allocations between bonds and stocks, they want to devise a strategic plan for spending in retirement to maintain a certain quality of life.
Therefore, if advisors can adjust their approach to starting with those goals and then developing an investment strategy to meet each one of those targets, it gives clients a much clearer idea of how their portfolio relates to everyday life.
Investing for the Future
In addition, goal-based planning removes the focus away from the near term and towards whether the client is on track to achieve long-term objectives, which is much more constructive. (For more, see: Retaining Clients: Top Tips for Financial Advisors.)
Most advisors run into difficulties with managing the expectations and reactions of an overemotional client who is prone to panicking over short-term market fluctuations. By emphasizing the long game from the get go, Finke argues, clients can develop much healthier expectations and will be less likely to make mistakes in the short run.
This is especially critical for retirees or near-retirees who are less aware than their younger cohorts about the impact of behavioral biases and relevant findings from social sciences.
Not only that, old age is correlated with a decline in financial acumen, according to research by Finke and colleagues from the department of finance at Texas Tech University and the University of Missouri. Their study shows that financial literacy scores drop by about 1.5 percentage points every year after age 60, regardless of gender, wealth and even education and experience with stock trading. Compounding that effect is the finding that while literacy deteriorates, confidence in one’s ability to make sound financial decisions does not.
This is where financial advisors can step in to guide clients and ensure they stay on the right track.
New Approach to Financial Planning Education
Clients are not the only beneficiaries of goal-based wealth management. Financial advisors, too, will develop a new set of skills from the practice, Finke says. They will need to learn how to align a portfolio with a specific target while allowing for potential changes, as opposed to simply picking stocks and funds for a given time horizon and risk profile. (For more, see: How Financial Advisors Lose Clients.)
The latter is not where advisors provide value, especially now that computer algorithms can do it better and with greater efficiency. What really adds value is developing goal-oriented strategies with clients, making tradeoffs among some of those individual goals and helping them understand what their different accounts and investment portfolios do so they can make decisions that are beneficial to their financial future.
To that end, the American College of Financial Services is launching a new designation to teach the goal-based approach, which Finke describes as a “deep dive into advanced planning in wealth management.”
“The philosophy is we are going to assume that advisors will use an investment portfolio as a tool to help clients meet long-term goals.” The focus will no longer be on constructing that portfolio, Finke explains.
The Bottom Line
The Wealth Management Certified Professional (WMCP) program will be available starting in the fall of 2017 to professionals with at least three years of financial services experience, the same requirement as the CFP, Certified Investment Management Analyst (CIMA) and Chartered Financial Consultant (ChFC). It will be offered in an online self-study format.
The time commitment is nine to 12 months, culminating in a four-hour exam. The program will cost $3,500.