Jerome Bodisco
Objective-Based Investing (OBI for short) is an investment approach that seeks to align investments and portfolios with the client’s specific needs and objectives. The result is one or more customised portfolios each designed to achieve a specific desired outcome over a defined period with a high probability of success.
The approach offers greater certainty to the client and allows financial planning to be conducted in a far more precise manner.
This is very much unlike common industry practice of matching products according to the nebulous notion of the client’s risk profile.
Why is it important?
OBI recognises that individuals are unique, with needs and objectives that are equally unique. It is a complex financial problem to solve which partly explains why the industry at large has persisted with the traditional risk profiling approach to portfolio construction.
In our experience, not only do clients have several objectives and needs at any one time, but those goals also tend to change over time. Clients want and need investment portfolios and advice that addresses critical matters such as their need for security, an enjoyable lifestyle and a meaningful legacy. They also need those solutions to be flexible and regularly reviewed, recognising that circumstances, markets, priorities and goals are ever-changing.
The advantages? Clients receive an individually tailored solution which gives a greater level of confidence that their portfolio is likely to achieve their own financial goals. The approach also encourages the client to take a greater interest in their financial affairs and to work very closely with their planner through the years. This partnership approach increases the likelihood of success and reduces the possibility of disappointment or regret when markets fall or personal circumstances change.
Building an objectives-based investment strategy
Objectives based investing is an integrated set of activities which start and end with the client.
Step 1: Objectives come first. We start with identifying a client’s multiple objectives, translating them into dollars and specifying the timeframe within which they need to be met.
The planner must understand their clients’ investment objectives, psychology and behaviour, then construct, maintain and make the necessary adjustments to an investment plan over time that delivers to the client’s specifications. Success is not about out-performing competitors or the market, but about delivering to the client’s goals.
Step 2: This happens behind the scenes. It is generally impractical to develop a completely unique investment strategy for every possible client goal – so our investment team develops and regularly reviews ideas in 4 investment “buckets”. These are scalable solutions that enable us to focus on best of breed products and gain cost efficiencies through scale. Each ‘bucket’ has a different timeframe and target risk and return:
“Foundation” bucket: This includes an ‘emergency’ or working capital cash flow reserve aimed at meeting any capital or income needs for the next 3 years. It only invests in assets that are highly liquid (cash, bank bills etc.) or investments that have pre-defined liquidity constraints (term deposits), with essentially zero chance of capital loss.
“Preservation” bucket: This protects the purchasing power of assets from erosion by inflation and capital depreciation over the medium term (3-6 years). We include both income generating and growth assets that aim to deliver a consistent return above inflation. Asset allocation is dynamic, recognising changing market conditions and valuations.
“Accumulation” bucket: This targets a higher return than the Preservation bucket, over a longer-term horizon (6+ years). Capital preservation is still important but growth is the primary objective, using diversified assets with a stronger tilt towards equities.
“Acceleration” bucket: This one is for investors with a high understanding of asset markets, and a desire to be personally involved with their investments and to access unique opportunities not available to most investors. They must be comfortable with the typically higher risks of these investments. Assets are not allocated to this bucket until a client’s essential lifestyle needs have been met via more conservative approaches.
For each bucket, we develop and regularly review a number of investment options that we believe can deliver the required result for different types of client. These include fully implemented solutions, managed funds, and direct securities.
Step 3: Is to construct the investor’s unique investment portfolio. This is done by the planner and involves matching the client’s unique goals with the appropriate investment bucket, or combination of buckets. Profile uses proprietary modelling software to facilitate this exercise, to optimise and customise the portfolio mix. To do this, we look at 4 key elements of the client’s objectives:
When will cash be required? This can be to fund income, or for specific individual goals (such as an overseas trip, business, home or car purchase, gifts to family members and so on). For our not-for-profit clients, investments might be required to support specific charitable works over a number of years.
What rate of return is required? For clients in the accumulation phase where little or no withdrawal is expected until retirement, we calculate the return needed to hit the goal, taking into account regular expected contributions.
What level of involvement is desired? Some clients are looking to completely delegate investment decision-making, whereas others are keen to be deeply involved. Different types of investment will be needed depending on this factor.
What level of risk is the client comfortable with? If a client’s tolerance for risk is incompatible with the risk required to achieve their goals, it will cause problems down the track!
Importantly, this process is re-run at least yearly for our clients. No effective plan is static and we must take account of clients’ changing goals and needs, and changes in markets.
Conclusion
Profile constructs tailored portfolios and solutions that have a high probability of meeting client goals.
Profile Financial Service’s Objectives Based Investing framework has been instrumental in delivering desired outcomes and achieving the individual financial goals.
By Jerome Bodisco, Head of Investments
