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Goals-based advice hasn’t translated to portfolios, TAMP says

Financial advisors eager to help clients avoid panicked decisions may need to keep their own biases in check, too.

To steer clear of behavioral losses, advisors should make sure they're lining up asset allocations toward each particular client goal, SEI says.

Advisors are more likely to separate assets based on whether they’re working with qualified or non-qualified retirement plan money than they are to sort them based on clients' goals, according to new research by Independent Advisor Solutions, SEI’s turnkey asset management program, technology provider and practice management arm.

SEI 2019 financial advisor survey

The TAMP and consultant spoke with more than 600 advisors and 600 clients in April. SEI has invested more than $1 billion in the tech platform since it began its goals-based research in 2003, according to John Anderson, head of practice management solutions.

As more brokerage firms, fintech vendors and other TAMPs aim to service goals-based planning, SEI found that 59% of advisors deploy a goals-based framework rather than using modern portfolio theory. And 86% say they align each individual portfolio to a specific goal.

The problem, according to SEI’s research, lies in the fact that 52% of advisors manage only one or two portfolios per client. So they “more than likely” aren’t really using a goals-based asset allocation process, the research paper states.

“They may be doing a good job of discovery, but the implementation is definitely lacking,” Anderson says. “They're also doing, I think, a poor job of reporting. So they're still tying to the S&P or the Dow, versus what the client's goals are.”

The correlation between fees and performance is not “apples-to-apples when taking the funds’ underlying exposures into account,” an expert says.
July 17

SEI argues clients would be less likely to panic during volatile times if they could measure their progress toward each goal. The paper outlines methods for advisors to create pools or sub-portfolios aimed at a time horizon and categories like growth, stability and income.

For example, a 57-year-old business owner could have one portfolio for cash-flow needs, another for buying a second home and retirement and a third for long-term care. A 28-year-old IT professional could have separate pools for emergency cash, buying a home and retirement.

Advisors may need to confront their own biases, as well. More than a quarter (26%) rated overconfidence as the behavior they needed to keep most in check and 21% ranked avoidance of regret first. Hindsight, overreaction and belief perseverance also received votes.

“Those biases that individual investors face, advisors also face,” says J. Womack, SEI’s managing director of investment solutions. “So one of the real values of a goals-based wealth management framework is putting rails around both investor and advisor behavior.”

In the past three years, SEI has moved each of the 7,500 advisors using its tech platform onto an enhanced version designed to use goals in asset allocations, according to Anderson. More of its broker-dealer clients are also enabling advisors to tap SEI’s full capabilities, he says.

Anderson and Womack acknowledge the firm faces stiff competition in pitching its offerings. The independent advisors working with the firm manage some $65 billion in client assets, though. And SEI is leveraging the resources from across its 3,500-employee parent, Womack says.

“We have all these learnings from an asset management perspective, from institutional; we have an understanding that we developed by working with banking clients,” he says. “And so there's this really rich mixture of ideas that ultimately get implemented in the platform — and it's a part of how we try to drive value for advisors.”

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