Performance may miss investor goals
Advisers are being urged to adopt an investor-centric goals-based investment (GBI) approach to their advice to clients, rather than focusing on performance.
Research from the EDHEC-Risk Institute found that goals-based investing increased the probability of achieving investors' important or aspirational goals, compared to traditional approaches.
The research paper said traditional product-centric approaches to financial advice based on an estimated risk-aversion parameter needed to be replaced by a goal-based investor-centric approach to wealth management.
"Most financial advisers still maintain a sole focus on market risks taken in isolation, with investors' preferences crudely summarised in terms of a simple risk-aversion parameter," the paper said.
"Individual investors' investment problems can be broadly summarised as a combination of various wealth and/or consumption goals, subject to a set of dollar budgets, defined in terms of initial wealth and future income, as well as risk budgets, such as maximum drawdown limits, for example.
"The starting point of an investor-centric GBI approach consists in recognising that the success or failure of these goals subject to dollar and risk budgets does not critically depend upon the standalone performance of a particular fund nor that of a given asset class. It depends, instead, upon how well the investor's portfolio dynamically interacts with the risk factors impacting the present value of the investor's goals, as well as the present value of non-tradable assets and future income streams, if any.
"In this context, the key challenge for financial advisers is to implement dedicated investment solutions aiming to generate the highest possible probability of achieving investors' goals, and a reasonably low expected shortfall in case adverse market conditions make it unfeasible to achieve those goals."
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