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How is it different?

The goals-based approach to investing is different as it represents a real shift in the way financial advice is given and the way investment solutions are designed. You could say it’s about turning financial advice and investment products on their head. However, it is important to note that the principles of diversification and risk management are still an important part of the portfolio construction process.

The traditional approach

  • Theoretical and quite complex
  • Solely focused on an individual’s risk profile, rather than what they want to achieve
  • An individual is invested in a pre-packaged investment solution that best matches their risk profile

The goals-based approach

  • About developing a deep understanding of a family’s current and future liabilities, then constructing a portfolio that aims to achieve their financial goals using a mental accounting framework
  • Focuses more on total return outcomes or specific goals such as generating a reliable income stream
  • Risk isn’t viewed as outperforming or under performing a benchmark, it’s about will I fall short of my goals? What do I need to do to ensure I am on track to meet my goals?
  • Investment solutions are designed based on client research which helps to ensure they meet client’s goals

The research behind behavioural economics

The work of Kahneman and others helped form the basis for a new approach that is focused more on achieving investors’ specific financial goals and in doing so helps them stay on track.

Economic models usually assume that people make rational decisions, however in reality decision making is not just based on facts and reason, psychology and sociology play a role too. Behavioural economics looks at why people may make irrational decisions and it relaxes the assumption that investors and markets are always rational.

In 2002, Professor Daniel Kahneman, of Princeton University, won the Nobel Prize for Economics, based on his work in the area of behavioural finance.

Kahneman studied how investors actually think and behave, rather than how financial theories and theorists suggest they should behave.

Behavioural finance can help explain why many investors tend to buy high and sell low, why they tend to become greedy when markets are approaching a top, and why they become fearful when markets are at or near low points.

The key to making your clients happy

As an adviser you play an incredibly important role in helping people achieve happiness in their lives and live the life they want. Research shows that individuals who are financially in control are happier and are more likely to become advocates of the financial planning process.

 

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AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy

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AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy

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