The Missing Link

Connecting Goals-Based Wealth Management to Investing.

Deep Srivastav

Deep SrivastavHead of Client Strategies & Analytics, Franklin Templeton

Wylie Tollette, CFA

Wylie Tollette, CFA Head of Client Investment Solutions, Franklin Templeton Investment Solutions

Preview

Our novel take on goals-based investing, called the goals optimization approach, simply means working backwards from one’s investment goals or objectives to choose and vary one’s investments over time so as to maximize the likelihood of achieving each goal, subject to the constraints imposed by reality. As such, goals-based investing flips an established process on its head. It is not a magic formula for success, but rather a set of disciplines and processes that help a financial professional to guide his or her clients in ways that are likely, but not guaranteed, to beat more traditional approaches.

Our approach to goals-based investing thus upends the tradition of maximizing savings, choosing an “optimal” portfolio (based on one’s risk tolerance), rebalancing periodically, and hoping that the end result is satisfactory. This tradition, while based in real science, is in dire need of updating. We believe the approach we propose should lead to better outcomes because it allows for—requires—change in the investment mix and risk level as circumstances change, something we all do in every other aspect of our lives.

The goals are typically multiple, and expressible as “needs, wants, wishes, dreams.” To that end, Franklin Templeton has created a Goals Optimization Engine, or GOETM, which converts needs, wants, wishes and dreams to portfolio allocations that respond to changing market conditions and individual circumstances. Needs should be fulfilled with as high a probability as is practical. Achieving any of the goals involves risk, which the goals-based process manages so as to increase risk when it is most likely to pay off (increase the probability of achieving the goal) and reduce risk as the investor gets closer to their goal.

Clients deserve such thoughtful treatment and will get it with Franklin Templeton’s approach to goals-based investing.

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.