Goals-Based Investing 101

This is for your clients – we thought we would give you something you can use with your clients or prospects: feel free to copy, paste and share if it helps you or your clients!  

Why do we invest? Why do we put money in the bank? Is it simply because we should or we’re told we’re should? No – it’s because it helps us to achieve our goals.

Goals-based investing is increasingly popular as a financial planning strategy – it’s a pathway to financial freedom and choices such as the chance to travel, provide our kids with a good education, purchase things we love, build our homes and create foundations for our future.

So how does it work and how can you make goals-based investing work for you?

Goals-based investing: what is it exactly?

Pablo Picasso once said that “our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”

Sound words of wisdom from an influential artist which can also be applied to the art of investing. According to AMP Capital, goals-based investing is an approach which aims to help people meet their personal and lifestyle goals in a straightforward and simple way.

So whether it’s having enough money to retire on, being able to afford regular trips to Fiji or leaving a lovely little wealth legacy for your grandchildren so they can dive into the property market (who wouldn’t want that as a grandchild?!), your goals are placed firmly at the centre of your investment strategy and financial advisors work with you to achieve those goals/dreams/bucket lists. This means you can also look at different investment solutions to suit your particular goals.


How is it different?

Traditionally, financial advice has been considered theoretical or academic and can often be quite complex. A financial planner will look at your specific circumstances and your risk profile and then select an investment solution which fits your type.

Goals-based investing works differently – it focuses on creating a portfolio which helps you reach specific goals and incorporates a deep understanding of your family’s current and future liabilities at the same time.

The work of behavioural economic theorists such as Professor Daniel Kahneman (who studied investors actually think and behave, rather than how financial theories and theorists suggest they should behave) helped form the basis of this approach, which is seen as a big shift in the way we receive financial advice and the way in which investment solutions are created. The theory recognises that people make decisions not just on facts and reason but on emotions, psychology and for an array of social reasons and influences.

So rather than looking just at risk profiles and benchmarks, your financial advisor will look at risk from a goals-based perspective. Will you fall short of your goals? What’s going to help keep you on track? What kind of investment solution best meets your chosen goal?


4 ways goals-based investing leads to success

Here are 4 ways goal-based investing can help you:

  • Makes you happier: It’s infinitely more fun to put money away when you know it’s going towards paying for your villa in the south of France or Christmas presents for your children. A 2010 Aviva Feelgood insight study, produced with input from a leading psychologist at London’s City University, revealed that overall happiness, wellbeing and self-esteem are influenced by our sense of financial control and a more recent survey conducted by Psychology Today in the US confirms that financial control makes people happier. So the more you set financial goals and achieve them, the happier you’ll be.
  • Avoids under-saving: According to Dan Egan, Managing Director of Behavioural Finance & Betterment, goal-based wealth management is necessary for maximizing how effectively you manage your money and investments, including knowing when you can afford to spend more than you might think today. It also helps you to look at risk in a different way – it’s not just an annual volatility, it depends on your time horizon, life stage and specific goals.
  • Strengthens your ‘mental accounting’ abilities: According to Egan, this approach leverages your mental accounting to improve your overall savings behaviour. “Mental accounting means that you make decisions based on the red or black of each individual account, rather than view them in the aggregate, says Dan. “While this could lead to unwise decisions as it may limit a holistic view of your finances, you can also use mental accounting as a strength. By creating many different mental accounts, you ensure that you are saving optimally for each of them—and do not rely on one account to cover all your required future liabilities.” Like the old-school envelope system but better!
  • Helps you better manage your risk: Goal-based wealth management matches your time horizon to your asset allocation so that you can take on the optimum amount of risk. So if you’re a retiree, instead of a single diversified portfolio based on your risk profile, your advisor may develop a series of sub-accounts with specific strategies to separately fund your needs, wants and aspirations in the future over differing time horizons (sometimes referred to as the hierarchy of goals). You’ll then have the confidence in knowing you’ve got enough cash flow,  to fund the golden years or the money to leave a bequest.


Tony Robbins says that setting goals is the first step to turning the invisible into the visible. Goals-based investing is one way you can tap into the power of behavioural economics and achieve financial outcomes that are tailored to suit your life stage, priorities, dreams and aspirations. This doesn’t mean you ignore the principles of diversification and risk management – it just means you can make your goals visible, tangible things and create financial control and freedom (and be happier while you’re at it).


Feel free to copy and paste if it helps you and your clients! Leave a comment and let me know if this was helpful?

Chris Wrightson. Founder and CEO at Centurion Market Makers, the industry experts in the sale, acquisition and management of financial planning firms. If you’re planning on selling your firm in 2017, we’d love you to call us for a confidential discussion, or continue browsing our website for more tips, tools and info on the steps to take when buying or selling your financial planning firm.

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