How to anchor your portfolio and protect your wealth when markets ‘wobble’

Goals-based investing can provide a secure anchor for investment portfolios when the markets get swept away by volatility and uncertainty, says Andrew Broadley, Executive at Standard Bank Wealth.

The recent turbulence and “wobbles” in the markets in the face of geopolitical headwinds and moribund economic conditions locally may have been enough to send many investors rushing for the exits. But Broadley says that there is international research that provides evidence that retail investors who have a clear goal in place will typically be far less likely to make an irrational – and ultimately costly – decision to sell out at the wrong time.

Broadley met with leading international research and advisory service provider, CEB Gartner, who have previously analysed investor behaviour to find out what happens during a time of extreme market volatility. The research reveals the startling statistic that 75% of investors who had a goals-based investment strategy made no hasty changes to their portfolio. However, for those with a traditional investment portfolio, only 20% stuck the course and made no radical portfolio changes.

“Running for the hills in the face of bad news has been a common emotional reaction by investors for centuries. When the dust settles, they usually realise that their decisions were made in haste and if they had stuck to their course they would have been much better off in the long run,” says Broadley.

He explains that financial planners that adopt a goals-based philosophy can completely change the nature of the conversation with their clients and as a result can ensure that their client establishes an “emotional connection” with the investment portfolio. Selling out on a whim – like wanting to buy that next flash car or expensive holiday – is less likely to happen if the client realises that an important long-term goal is being threatened.

“If a separate investment portfolio is created for the delivery of each goal, your clients will have a much stronger bond with each portfolio. This then helps your clients to better navigate through all the uncertainties that they will inevitably face.”

According to another CEB Gartner research piece, 90% of the financial planners interviewed claimed that a goals-based advisory approach to investing is better than the traditional approach.

“In the traditional approach, the completion by the client of a simple risk profile would result in a portfolio being constructed that is medium conservative, for example, without ever being linked to the specific return requirements, investible time horizon and relative importance of a specific goal. It is not surprising that CEB Gartner’s research showed us that 89% of the financial planners interviewed are confident that they now have a much higher ability to deliver value to their clients,” says Broadley.

It is not just the financial planners who are convinced of the value of goals-based advice, the investors themselves seem to agree. A further CEB Gartner international research report provided the evidence, showing how the rating by the clients surveyed increased from 4.8 to 5.3 once they were advised in the new client-centric, goals-based method.

“Notably, there is an uplift of 21% in the rating given by clients of the value received by them relative to the fees paid. Although this is data based on international clients, I would expect the same to hold true here in South Africa. With high fees one of the major challenges to overcome in the domestic investment market, this is a significant insight,” says Broadley.

Other notable benefits of goals-based planning is a dramatic shortening of the planning document to just a few, succinct pages – as opposed to the reams of often unintelligible information thrown at investors before. And according to Broadley, planners are also getting “much more productive with their time”. It is little wonder that the client satisfaction ratings identified by CEB Gartner have shot up from 55% to 71% after they have been through a properly interactive wealth assessment.

These changes are also important for the financial sector as a whole because client retention and expansion is much higher when satisfaction levels improve. When asked: Are you likely to take future action with our firm, 62% of the ones who went through the wealth assessment process said they would take future action, according to the CEB Gartner survey.

“With the ‘wobble factor’ in the markets a reality, it is important to ensure clients stay the course and don’t jump ship unnecessarily. Goals-based approaches to investing will see investors less likely to liquidate or make dramatic changes, while ensuring savings rates improve,” says Broadley.

For instance, if you are saving for a dollar-based goal, like sending a child to an overseas university, this model ensures you don’t bring that money back just because the Rand suddenly strengthens.

“With a goals-based approach to investing, the evidence is clear that you are now much better anchored to ensure that inter-generational wealth is created,” concludes Broadley.