Wealthtech Insider: Bucketing Client Goals to Help Them Protect, Live, and Dream


In the most rational sense, money does not come with a purpose. The same dollar can be used to meet an infinite number of different ends.

However, behavioral finance has discovered a tendency in humans to create “mental accounts” or “buckets” and having a bucket earmarked for safety can go a long way toward calming the nerves of rattled investors.

What we now call goals-based investing is drawn from an intellectual heritage rooted in the financial application of Maslow’s ideas by Lola Lopes, and later Hersh Shefrin and Meir Statman. Lopes’ breakthrough theory is known as SP/A theory, where the S stands for “security,” the P for “potential,” and the A for “aspiration.”

Security, much like the bottom-most rungs of Maslow’s Hierarchy of Needs, represents our most primal financial needs, which is rooted in the emotion of fear. Behavioral economists have demonstrated time and again that investors are far more sensitive to loss than comparable gains. Until the fear of such a loss can be meaningfully brushed aside, it will predominate and hamper all higher-level wealth-planning considerations.

Potential relates to the general wish for high degrees of wealth and Aspiration reflects the desire to work toward specific financial goals. As opposed to the fear-based emotions underlying Security, Lopes posits that Potential and Aspiration are driven by a hopeful outlook.

Why does this matter to your clients? Think about traditional approaches, based on the “rational” idea that money is fungible, that lump money into one pile and report sum totals and performance against a benchmark.

There are at least two negative consequences to this approach:

• Two points of felt loss (loss in absolute terms and “loss” relative to benchmark underperformance)

• Perpetual dissatisfaction at wanting to take risks in bull markets and have safety in bear markets (all while supposing omniscience on the part of the advisor relative to what kind of market we are and will be in)

Rather than take this “one bucket” approach, look for strategies that allocate to buckets that correspond with various goals – safety, income, tactical, and accumulation. At each point along the journey, advisors can speak to meeting this divergent but simultaneous goals, allowing the investor a sense of felt safety while still allowing for the pursuit of more aspirational goals.

SEI, who had clients in both goal-based and traditional strategies at the time of the 2008 financial crisis, was well positioned to observe the calming effects of a bucketed strategy.

Clients in a single, traditional investment portfolio:

• 50% chose to fully liquidate their portfolios or at least their equity portfolios, including many high net worth clients who had no immediate need for cash.

• 10% made significant changes in their equity allocation, reducing it by 25% or more.

Clients in a goals-based investment strategy:

• 75% made no changes.

• 20% decided to increase the size of their immediate needs pool but left their longer-term assets fully invested.

SEI’s key finding was that “Goals-based investors are less likely to panic and make ill-informed changes to their portfolios.” Each investor is a confusing amalgam of emotional needs and has the simultaneous need to protect what they have already earned while also reaching for ever-greater levels of wealth up the risk spectrum.

To learn more about how Orion’s Protect, Live, Dream framework encourages investors to reach their long-term financial goals through bucketing strategies, visit The Center for Outcomes.

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