WEALTHTECH INSIDER: Using Financial Goals To Keep Clients On Track


Our goals, whether they are financial or otherwise, should have two foundational elements: (a) they are specific to you, meaning they have personal value for you, and (b) they are aspirational, meaning they have an element of being emotional and inspirational. Obvious enough, right? You wouldn’t set a goal to finish dead last in a 10K race or aspire to paint the world’s most mediocre still life.

Those examples defy common sense, but this is exactly what millions of Americans do when planning their financial futures. They compare their returns to a broad market index like the S&P 500 or some other average benchmark. The word “average” is a clue as to why these goals fail to engage clients.

No one sets out to live an average life. We don’t dream of average happiness, average fulfillment, or an average marriage, so why should we settle for an average portfolio? There is a sad irony in the fact that so many investors, excellent in their other endeavors, spend so much time and energy worrying about how they stack up relative to such a mean hurdle.

But benchmarking to indices like the Dow or S&P 500 isn’t the only external comparison leading us to make irrational decisions; there’s also our tendency to benchmark to The Joneses. We’re all familiar with the phrase “keeping up with the Joneses,” but we might not understand just how deeply it is ingrained in our concept of wealth and success.

Each year, a Gallup poll asks Americans to determine “What is the smallest amount of money a family of four needs to get along in this community?” Gallup finds the answers to this question move up in line with average incomes of the respondents. For those without a well defined goal of success, the answer to “How much is enough?” seems sadly to be, “Just a little more than I have today.”

This tendency to make ourselves miserable by trying to keep up with the neighbors can be easily overcome through the use of intentional, personal benchmarks. What motivates you more, saving for your kid’s college expenses, or beating the S&P 500?

Advisors must help investors understand that money is only as good as the goals it helps them reach. Many investors approach the markets myopically, a tendency only furthered by the ubiquity of reports on how the market fared on any given day (or hour, or minute). However, most deeply meaningful goals have a time horizon of years or decades. If saving for your kid’s college is the benchmark, what do you care if the S&P is down 200 points today? That’s not the game you’re playing.

Perhaps the biggest benefit of all is the way in which a goals-driven approach provides shelter in the storm. Benchmark investors, anchored as they are to the index and the actions of others, tend to lose focus in market downturns, which accounts for the “behavior gap” documented so well by Dalbar and others.

Purpose-driven investors, on the other hand, have a “why” helping them deal with almost any “how.” We’ve all had the experience of sacrificing our personal comfort to do something deeply meaningful, but it seems silly to suffer pointlessly. Thus, those with an important reason for staying invested, one bigger than the momentary discomfort of a paper loss, are more likely to do so, whereas those affixed to an arbitrary indicator have no real reason to stay the course.

Once dreams have been connected to financial realities, sensible behavior ceases to be a chore and becomes a natural extension of a life well lived.

To learn more about the role investor psychology plays in strengthening client relationships and engagement with long-term goals, visit The Center for Outcomes.

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