Goals-based investing is redefining the investment industry. By placing the client’s dreams and goals firmly at the centre of the investment and planning process, it significantly enhances the prospect of clients reaching those goals.
More and more advisers are recognising the power of goals-based funds to deliver investment outcomes that are aligned retirement outcomes and risk.
To find out just how goals-based funds can benefit advisers and their clients, we spoke with Peter Audet, managing director of Brisbane-based advice practice Varria, who has incorporated goals-based funds into retirement portfolios.
Thanks for your time Peter, can you firstly tell us a bit about your practice?
I started the practice in 1995 on my own and went through a series of mergers and acquisitions beginning in 1999. By 2009 I had got to point where I had bought out all previous business partners.
Only this year from February I’ve taken on four other shareholders. It’s been mostly me as a major shareholder and AMP (who inherited the APSF holding after they bought AXA) as a minority shareholder for quite some time.
A focus on M&A along with a strong focus on organic growth has driven our growth and we now have a 17-strong team with offices in Brisbane and Toowoomba servicing over 1000 clients.
Who are your typical clients?
We have a really broad range of clients. I don’t know you’d call any single person typical. We’ve got everything, retirees, business owners, professionals: engineers, doctors, lawyers, accountants, school teachers and nurses. People from almost every professional walk of life across the Australian spectrum. It’s a really diversified business.
Our value proposition has always been around advice: good financial decision making. We’ve been quite agnostic and haven’t needed to focus on any particular employment category or age.
We tend to think out target market is the human race! We’re all pretty much bad decision makers with money because all our instincts fail us and there’s a lot to learn. We would argue very strongly we don’t have any particular person as target because, generally speaking, all people have an inherent poor decision making with money and we’ve got pretty good at helping.
In terms of retirees, we have 50 per cent of our client base in retirement and 50 per cent accumulators.
What are some of the common goals clients would specifically like to address in retirement?
We tend to find that when you really drill down with people, particularly retirees, what they’re trying to achieve isn’t so much just about having income, it’s about income stability.
People tend to want fewer surprises and more consistency around their capacity to meet their obligations as they go forward.
People are far less likely to want to be risk takers as retirees. Even if they were a risk taker before retirement, it seems to be that once you remove people’s capacity to contribute to the source of income, the corresponding reaction is to take a lot lower level of risk along the way.
It’s a lot easier as an accumulator because when you’re making money and contributing all the time there’s so much less risk of failure because the negativity in the market is your friend on the way through when you’re contributing it’s better to get those periods of undulation in markets so your average buying price is much better.
But when you’re a retiree it’s suddenly all against you and it’s so much more important to have stability. People are much more sensitive than they otherwise would be when they were younger.
How do you go about constructing portfolios to meet specific client goals? How are you using GB funds?
We looked at a couple of major themes to try and get stability. One of those was around asset allocation generally and about not over-allocating so growth assets in retirement so you don’t have too much market influence. It’s also really taking on board that you don’t have to be a 70 per cent growth investor to achieve a reasonably good average rate of return.
But then we looked at using multi-asset funds particularly for the dynamic asset allocation component of the strategy. We wanted some level of activity all the time in the portfolio to try and deliver consistent rate of return. We also wanted a fund that’s actively sensitive about risk and not just strategically asset allocating and letting the market deliver that rate of return as it will over time. We wanted a dynamic asset allocation that actively tried to defend the position of the portfolio, but at the same time looking to generate a relatively positive and consistent rate of return.
What do you see as the benefit of GB funds over traditional diversified funds, particularly in retirement?
Perception is really important. If you showed the average investor an asset allocation pie graph, and asked them if it moves with market risk, they would say yes.
Most people would be surprised to find out that once you set a benchmark in asset allocation that no one moves it.
A lot of the time when we talk to clients about using the AMP Capital Multi-Asset Fund, which runs a DAA strategy, we’re explaining to them that what they’re getting is probably what they thought was happening the entire time when it wasn’t: that is, a part of the portfolio is sensitive to where it perceives there’s market risk and actively takes steps to derive a return out of the market and mitigate some of the risk at the same time.
Has using GB products helped the investment experience of your clients?
Absolutely. They have comfort that when they see the market move, a key part of their portfolio is actively anticipating market volatility and taking steps to mitigate the effect that has on the portfolio’s value.
It appears from my conversations with lots and lots of people that they are not happy to just have buy and hold passive approach to market volatility. That they want some of their portfolio to actively take steps to mitigate the volatility that are experienced in the market.
And they’re prepared in circumstances like that to give up some of that overperformance to protect themselves against some of the downside risks.
What has been the feedback from clients?
There’s been fewer phone calls. No one rings us when the market moves anymore. So it’s a bit of an anticlimax.
That’s because clients know we have agreed on a strategy we can control; and we’ve agreed on the fact there are things we can’t control. They know that part of the portfolio is a buy and hold strategy. But part of the portfolio (the AMP Capital Multi-Asset Fund) is always active and always looking to mitigate risk. So when we have market shocks or issues going on the phone doesn’t ring off the hook.
Over the years we have got our clients to understand that you don’t have to ring and you don’t have to panic. They know we have our feet in both camps – that we’ve got some good long exposure if the market has a nice run. But we’ve also got some good defensive exposure if things appear to be getting a little over heated and we’re looking for ways of letting the Multi-Asset Fund pick and choose assets that have a reasonable rate of return with a lesser level of risk associated with it.
The end result has been portfolios that have performed well.
Finally, how do you see your use of GB funds for retirement evolving into the future?
I think the future of these funds will be a move to using them as a permanent foundation asset in every portfolio. It’s not easy when you have a good long market run to remember what a negative period feels like, but I would encourage advisers not to be fooled. Clients will thank you more for stability in tough times than outperformance that comes at a significant risk. With returns, the means don’t often justify the ends. (or maybe I mean that the other way around!)
Peter Audet is the managing director at Varria. You can read the original article on the AMP Capital website here.