Goals-Based Portfolio Theory

CHAPTER 14The Future Structure of Wealth Management Firms

“Standing against the march of history might be a better solution, but only until history marches all over those who have resisted its progress.”

—Jean LP Brunel

Jean Brunel once quipped that goals‐based investing really does change everything.¹ Now that we have covered the nuts‐and‐bolts of goals‐based portfolio theory, it should be clear how right he was! The whole approach of goals‐based investing changes both the structure and nature of client interactions, as well as the actual management of the investment portfolio. As should now be obvious, the math is fundamentally different for goals‐based investors. Another keen observation made by Brunel is that goals‐based investing blurs the line between financial planner and investment manager.² Investment portfolios must be informed by goals, and goals, in turn, are influenced by the choice of investments.

Unfortunately, the current structure of wealth management firms is not conducive to delivering true goals‐based solutions. While financial planning has now long been part of most wealth management practices, to execute the plan, firms build model portfolios—large boxes that can only ever approximate client needs. Of course, to date this has been the only way to scale a practice. It is not possible to run thousands of different portfolios, each with a separate objective and investment universe without a considerable investment of man‐hours. Goals‐based portfolio theory ...