Goals-based investing is redefining the investment industry. It puts a client’s dreams and goals at the centre of the investment and planning process, and significantly increases the prospect of clients reaching those goals.
More and more advisers are recognising the power of a goals-based approach to clarify a client’s goals and then align strategies and investments with them.
To find out just how a goals-based approach can benefit advisers and their clients, we spoke to Kane Ellery, Private Client at Adviser at AMP Advice in Chatswood, Sydney, about how incorporating goals-based investing has helped clarify client goals, boost client confidence and streamlined the advice and investment processes.
Tell us about your practice and who your typical clients are
Our office is in the heart of Chatswood, a Northern suburb of Sydney that sits along the Northshore trainline. Within the practice, we have 17 staff, most full time, but we also have part time employees.
There are seven advisers – including Practice Principal, Malcolm Weatherley, who is still providing advice and three associate advisers, with the balance support staff. There is a great deal of camaraderie and respect amongst the staff here, with everyone always prepared to help when needed. In a really challenging time for our industry, being part of such a supportive group of people who care for each other makes all the difference.
Like most of the AMP Advice offices, we were previously an ipac practice, and our client base, which is approaching 700, reflects that. They are predominately pre-retirees and retirees, though the numbers of accumulators are increasing. Many of our retiree clients are entirely self-funding their retirement at this stage.
What are some of the common goals clients would specifically like to address in retirement?
You might think that clients in retirement, particularly those who have successfully built up significant financial assets, would have very clear ideas of their goals in retirement. But often it’s not quite as clear cut as that.
Many clients in that stage of life keep things fairly simple and deal primarily with the short term. This gives us the opportunity to have the conversation about their goals and objectives.
We would generally start by defining their fundamental lifestyle funding goal, and once we specify value and time frames, we can then discuss broader goals.
Our new Goals 360 modelling tool is really helpful in this regard. Clients can see a list of goals, which helps them identify what they want now and into the future.
The main challenge that some clients will face, however, is around the longevity of their capital. With life expectancy continuing to increase, people spend more time in retirement. In the past, people generally didn’t have to plan for lengthy retirements, but now we recommend planning for 30 years or more.
Retirement for many today isn’t just sitting on the porch watching the world go by. Retirees want to live active and engaging lives.
Though clients may not initially have a great deal of clarity on this themselves, the process of goal discovery though discussion and consultation using the Goals 360 engine can broaden possibilities.
In saying that, though, we all have a few clients that are very clear on their goals, and likewise the projective modelling also allows these clients to explore their goals in great detail.
How do you go about constructing portfolios to meet specific client goals and how are you using goals-based funds?
Through ipac previously, and now with AMP Advice, we have a well-established method of portfolio construction where we consider three main themes which each represent a need that’s necessary to meet their goals.
We call this the time horizons strategy or the “bucket approach” because it looks at dividing a client’s invested funds into different buckets of investments, each with its own time horizon. Essentially, this approach considers a client’s short, medium and long-term expenditure needs and the appropriate strategy or investment for each period. The term ‘time horizons’ refers to the time clients have available to invest before their money needs to be accessed.
Clients can draw down on defensive pools to meet short-term income needs, whilst retaining the growth buckets to provide the portfolio with an inflationary hedge and access to capital growth.
In the past we would use various traditionally managed funds. However, the development and success of the goals-based funds has started to alter the more traditional method.
Today, we still use the time horizon approach as a baseline strategy, but I believe that goals-based funds can enhance a client’s portfolio because they allow for a more proactive approach, particularly with funds that invest to meet essential needs.
One of the funds we’ve used with success is the AMP Capital Income Generator. For clients, having an income-focused fund that delivers a known monthly income with the probability of some capital growth is reassuring.
The use of dynamic asset allocation in the approach of funds like the AMP Capital Multi-Asset Fund and MyNorth Retirement Fund (known as AMP Capital Core Retirement Fund) are also increasing for many of our clients, particularly those approaching retirement or in retirement.
But dynamically-positioned funds that are designed to mitigate risk are also appropriate for accumulators in the moderately defensive part of their portfolios.
What do you see as the benefit of goals-based funds over traditional diversified funds particularly in retirement?
I feel it’s really important that the themes and aims of a fund resonate with a client, and the aims of the dynamic asset allocation (DAA) funds like the AMP Capital Multi-Asset Fund and MyNorth Retirement Fund really appeal to clients, particularly those in that retirement life stage.
By the point we get to using goals-based funds, we’ve discussed with clients the various types of investment risks, such as sequence risk and market volatility and the detrimental effect it can have on their portfolios. We’ve also talked about their goals and what they want to achieve.
For many clients, they understand that the traditional approach taken to mitigate risk is not likely to provide much in the way of performance, particularly in the low interest rate world we’ve experienced for the past 5 or so years. They understand the traditional approach might compromise them reaching their goals.
Likewise, many don’t want too much exposure to funds with significant growth potential combined with significant volatility. The DAA (dynamic asset allocation) funds allow for a proactive approach to their portfolios, and for truly different strategies to work together within a portfolio.
The goals-based funds, particularly those that utilise dynamic asset allocation (DAA) can deliver consistent income and provide for their safety needs; but they also actively look to provide a solid rate of return, and be flexible during market volatility.
If we think about traditional retirement funds in the past, many of them were just conservative asset allocation funds heavy in cash and fixed interest. They generally weren’t specifically designed for retirees and their needs.
But goals-based funds incorporate funds specifically designed for investors in retirement, like the MyNorth Retirement Fund (AMP Capital Core Retirement Fund), which is managed with a focus on income and franking credits for investors in retirement who are drawing pension payments that are tax exempt.
How has following a goals-based approach to advice benefited your practice?
The feedback I’ve received from the clients that have started to use the goals-based funds has been really positive and encouraging. As I mentioned, I feel that the aims of the funds resonate with the investor and without a doubt these funds have been successful in that area.
I feel that the goals-based approach, has also increased the level of client engagement.
How has using goals-based products helped the investment experience of your clients?
From an investment experience, it’s enhanced on several levels. As mentioned, client engagement during meetings has increased, but at the same time these funds provide a level of peace of mind that was probably absent in the past.
If we also think about the time horizon approach to portfolio construction, we now have a suite of funds where clients have a clearer understanding of what the funds are looking to achieve, and this in turn has a huge advantage when we are looking to provide goal-specific investment advice.
What has the feedback been from clients?
The feedback has been really positive since we started using the goals-based funds. The AMP Capital Income Generator was the first of these funds that was really embraced by our clients, but since then, we’ve since seen funds like the AMP Capital Multi-Asset Fund, MyNorth Retirement Fund, and the Dynamic Markets Fund, also gain strong interest. I see no sign of that slowing.
Personally, I’m a strong advocate of the approach. It just makes sense, particularly for retirees. But I see the goals-based/DAA approach growing in appeal across into other demographics. I have no doubt that, in time, all types of investors will increasingly prefer DAA and goals-based funds.
Important note: ipac asset management limited (ABN 22 003 257 225, AFSL 234655) (ipac) is the responsible entity of the AMP Capital Income Generator (Fund) and the issuer of the units in the Fund. This document has been prepared by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital), which has been appointed to provide Fund related services to ipac. Investors should consider the Product Disclosure Statement (“PDS”) available from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (“AMP Capital”) for the AMP Capital Income Generator before making any decision regarding the Fund. Neither AMP Capital, ipac nor any other company in the AMP Group, guarantees the repayment of capital or the performance of the product or any particular rate of return. Past performance is not a reliable indicator of future performance.This document may contain projections, forecasts, targeted returns, illustrative returns, estimates, objectives, beliefs and similar information (“Forward Looking Information”). Forward Looking Information is provided for illustrative purposes only and is not intended to serve, and must not be relied upon as a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Many actual circumstances are beyond the control of AMP Capital or ipac. Some important factors that could cause actual results to differ materially from those in any Forward Looking Information include changes in domestic and foreign business, market, financial, interest rate, political and legal conditions. Various considerations and risk factors related to an investment in the Fund are described in the PDS. There can be no assurance that any particular forward looking information will be realised. The performance of any investment or product may be materially different to the forward looking information. Neither AMP Capital, ipac nor any other company in the AMP Group makes any representation or warranty as to the accuracy or completeness of any statement in this document including any forecasts.
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Investors should consider the Product Disclosure Statement (“PDS”) available from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (“AMP Capital”) for the AMP Capital Multi-Asset Fund (“Fund”) before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (“AMPCFM”) is the responsible entity of the Fund and the issuer of units in the Fund. Neither AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts.
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