Just as liability-driven investing created large changes in how retirement plans were directed, goals-based investing is, or should, be doing the same for private clients, a firm operating in this space says.

A US wealth management business aims to put clients’ goals as the central element governing advice, investment and support in the same way that liabilities of pension funds have driven defined-benefit retirement plans in recent years.

Wealthcare Capital Management, headquartered in Richmond, VA, is a business founded in 1999 and since 2014, owned by NewSpring Capital. Two weeks ago, NewSpring kicked off a second funding round; Wealthcare also released the latest version of its patented Financeware technology, which drives the firm’s goals-driven investment and financial advice platform. The update is called Financeware 3.0 and it involves enhanced navigation, a new client portal with an interactive Comfort Zone, expanded investment choices, and a straight-through investment policy process. (Comfort Zone is designed to give clients a clear idea of the path to their goals and give them confidence in the choices they have made; it allows clients to control specific variables and keep them on track through volatile and evolving markets.). 

Goals galore
The term “goals-driven investing” is one that came up frequently when this publication caught up with the firm’s president, Ron Madey. Building advice and investments around a person’s goals needs to be at the forefront of effective wealth management, he insists.

“We have increased assets under management by 100 percent since 2014 and in the next year and a half we expect to do the same. We are a leading-edge firm in terms of goals-driven investing,” Madey said. “Unlike traditional financial planning processes, which are not well-connected to the investment process, the ongoing investment decisions with Wealthcare are centered around the clients’ goals.” 

There is a parallel with how “liability-driven investing” became a significant part of the defined-benefit pension fund landscape more than a decade ago.  Then, the need for retirement funds to match investments with payouts became crucial amid ballooning deficits, falling bond yields and the end of the dotcom stock market boom.  Risk management needed to focus on the pension balance sheet to be effective and this triggered shifts in asset allocations.  Wealthcare has taken this risk management approach to the individual.  "We manage the client’s goals-based balance sheet, not just the assets,” Madey said.  

Madey noted the fact that there is across the wealth industry a complete lack of consistency in how a client’s stated goals and risk tolerance translate into investment decisions on the ground. “If you were to take a target 50-50 stock/bond risk allocation to 10 different advisors you’d get 10 different implementation recommendations in terms of specific targets by asset class and active/passive mix… yet the client goals and risk preferences are same.  Wealthcare’s investment policy and investment choice framework provides solution where advisors can more effectively match investment strategy with client preferences,” he said.

Wealthcare starts the process with considering clients’ values and goals; then it works through a “goals exchange” process to see what compromises might be necessary in reconciling some goals with others; it then runs a set of simulations to test a range of situations clients could encounter, and finally, its Comfort Zone platform enables to clients to keep on top of where they are in their financial “journey” to ensure they are on track.

This approach is part of a broader trend, driven to some extent by regulatory changes – the Department of Labor’s new fiduciary rule is an example – that are encouraging a move away from commission-driven sales of financial products towards more fee-based advice. Disenchantment with much of the financial sector following the financial crash of 2008, and more positively, the breakthroughs in technology, are also giving more prominence to businesses such as Wealthcare. There is, of course, much talk about so-called “robo”-advisors; however, even some more traditional wealth managers are using some of the “robo” methods to automate to some degree areas such as asset allocation and monitoring of risk, while retaining a human touch and feel to their businesses.

As the Baby Boom generation retires and transfers trillions to a younger generation more at ease with areas such as social media and the internet, it makes sense for wealth management to go more digital. There is also the issue of using tech to bridge a potential gap in talent: a study by Cerulli Associates in 2013 found 43 per cent of US financial advisors were aged 55 or over. Such a position favors relatively newer entrants to the wealth management space (source: Fintech Innovation, 2016, by Paolo Sironi, publisher: Wiley).

Wealthcare, founded right at the end of the 1990s equity bull market, might not fit into any neat category beloved by the media and PR industry, but with its 12 patents on planning and goals management processes, tech is clearly a big part of what makes this firm tick. It will be interesting to see if Madey’s prediction of further rapid AuM growth between now and 2018 holds up in the face of whatever financial weather comes its way.