Goals-based advice allows financial advisers to provide recommendations to clients regarding the strategies, decisions, conduct and effort required to increase the chances of reaching their goals, as well as to track progress and make periodic adjustments to stay on course.
By using a goals-based advice approach, financial advisers can help their clients define their goals, resolve goal conflicts, prioritise them, and track them across various time horizons.
This type of approach in financial planning is not new but what is new are the types of tools, processes and engagement skills available for advisers to efficiently deliver goals-based advice.
WHY GOALS-BASED ADVICE?
The Australian Securities and Investments Commission (ASIC) wants to see evidence that the financial adviser has identified the objectives (goals), financial situation and needs of the client as disclosed by the client through instructions (client’s voice); and that there is evidence that the subject matter of the advice sought has been thoroughly explored and is relevant to the client’s circumstances (RG 175). In March 2021, the Certified Financial Planner (CFP) board in the US added psychology to its eight principal knowledge topics for 2021 and one of the ways in which psychology helps the financial planning process is in setting goals.
Goal setting enables the creation by clients of a successful plan of action and helps them to choose the right moves to make, at the right time and in the right way. The comprehensive nature of goals-based advice develops a stronger bond with the client as it considers what they want from life, when they want it and what they need to do to get there.
A goals-based advice process:
- Sets meaningful goals;
- Determines time horizons;
- Quantifies effort and resources to be applied to each goal;
- Prioritises goals;
- Identifies key risks; and
- Sets purposeful strategies to attain the goals.
Clients do not always understand how important it is to clarify and define their expected outcomes in a clear and measurable way and this is where the SMART approach to goal setting proves very useful.
THE SMART APPROACH
Goal setting enables the creation by clients of a successful plan of action and helps them to choose the right moves to make, at the right time and in the right way.
In her paper on the science and psychology of goal-setting, psychiatric counsellor, Madhuleena Roy Chowdhury, said: “Setting goals are linked with higher motivation, self-esteem, self-confidence, and autonomy (Locke and Lathan, 2006), and research has established a strong connection between goal-setting and success (Matthews, 2015).”
The ‘Locke’ she referred to is Edwin A. Locke, a pioneer in the field of goal setting, who found that individuals who had highly-ambitious goals had better performance and a better output rate than those who did not.
Further, research in behavioural economics shows that the key reasons for not sticking to a plan or process are a failure to consider personal motivations and lack of coaching. Having a goals setting process not only unpacks a client’s goals but helps them stick to the plan.
Goal setting as a psychological tool for increasing productivity involves addressing five criterion. These are known as the SMART rule, first written down by George T. Doran in 1981 and modified over the years. Today, the SMART rule is typically defined as:
The SMART framework helps clients who are driven to action but find themselves stuck with ill-defined goals like I want to save more.
This goal tells us what the client wants but lacks clarity. By asking ‘how will you know when you have achieved that goal?’ advisers can help clients make the goal more ‘Specific’.
The goal should also be ‘Measurable’. How much does the client wants to save and what is the purpose of the savings? Without having a specific measure, it will be difficult to track progress in achieving the goal.
Sometimes clients select goals that, after discussion, appear to be in conflict with other goals or are not ‘Achievable’. Understanding the rationale behind the goal makes it easier to determine if the goal is ‘Realistic’ and in line with the client’s desired outcome.
All goals will need a ‘Timeframe’ within which they need to be accomplished. Applying the SMART goal approach may well result in a client goal changing to an agreed goal. For example:
“I want to start saving now so that when I retire at age 65 I will have an income stream of $10,000 per month.”
A goal like paying off debt is a good goal but it’s not a SMART goal. By using the SMART approach, advisers can help clients turn their goals into SMART-agreed goals over short, medium, or long-term. For example:
“We will pay off our debt of $200,000 (Specific) by June 2025 which is five years earlier than planned (Timeframe) by applying additional monthly payments of $5,000 (Achievable), by allocating 100% of my salary increase of $4,000 after tax and by reducing monthly expenses by $1,000 (Realistic and Measurable).”
The client’s goal of paying off their debts just became a SMART goal.
Two further components have been added to the above so that it is now called the SMARTER rule.
- Evaluative/Ethical – where interventions, evaluation of goals and execution follow personal and professional ethics and express something about the person’s values; and
- Rewarding /Readjustment – where the end results of the goal setting come with positive reward and bring a feeling of accomplishment even if slight readjustment is required.
Once goals are defined, advisers can discuss the importance, flexibility and likelihood of attaining each goal. They can then use this information to refine and prioritise them with the client and document the strategies in a Statement of Advice (SOA). For example, a client may adjust their dream to purchase a brand-new SUV and caravan and instead decide to purchase second-hand items at a lower cost freeing up money to help achieve other goals.
THE BENEFITS OF GOALS-BASED ADVICE
Some of the most important benefits of this approach are:
- Clients have greater clarity of purpose;
- Clients can focus on achieving their goals, rather than being distracted by market volatility;
- A closer client/adviser relationship, facilitated by constructive conversations that go deeper into the real issues motivating the client;
- A financial plan that is focused on the client’s goals and contain strategies that are appropriate for their priorities and time frames; and
- A sense of achievement when the client and the adviser meet and can tick goals off the list as they are achieved.
Goals-based advice is an ongoing process. Clients’ goals will change over time as new goals are added and existing goals are altered or discontinued as circumstances change.
By creating a goals discovery process that is built around the psychology of deeper engagement, you can lay the foundations for a more meaningful long-term relationship with clients and a review process that revolves around what’s really important to them.
SIX STEPS TO HELP CLIENTS SET SMARTER GOALS
- Help clients discover and articulate their values and goals: A discussion around the client’s values will deepen the emotional tie to their goals and will provide avenues to broaden their goals. If one of the client’s core values is the welfare of their family then a conversation about life insurance and estate planning can lead to goals being set to achieve outcomes in these areas.
- Explore client resources: Ensure clients have the maximum opportunity to achieve their stated goals. This will mean ensuring they have sufficient financial and other resources available.
- Determine if alternative approaches exist: If the value or goal does not feel right or resources are lacking, consider a different approach. You may be able to come up with an alternative to the stated goal. However, be aware that some clients may think an alternative approach means giving up, rather than an alternative way to achieve their goals.
- Write the goals down: Research has shown that if goals are written down and clients commit, on paper, and revisit their goals often, the chances of success are exponentially improved.
- Help clients be accountable: To help clients overcome their resistance to implementing goal recommendations use methods such as nudges, as proposed by Richard H. Thaler and Cass R Sunstein, in their book: Nudge and behavioural coaching. These work best with clients who agree that the action is important and necessary and may want reminders to ensure tasks get done. For clients unsure how to assess whether an action or recommendation is important, use strategies involving smart heuristics (mental shortcuts) which are less about completing tasks and more about helping clients understand the path to goal attainment, by having more meaningful discussions with you.
- Recognise the client’s progress: Celebrating efforts to goal attainment makes sticking to the plan more comfortable for clients. Provide tangible feedback through review meetings to ensure clients are staying on track and sticking to the plan.
How to create a top-notch review process