Goals-Based Wealth Management: An Integrated and Practical Approach to Changing the Structure of Wealth Advisory Practices

Chapter 6Goals-Based Strategic Asset Allocation

This is where the rubber meets the road. The concept is simply to change the way the typical strategic asset allocation process is conducted by recognizing that the goal of formulating a simple return/risk trade-off for the typical individual or family is elusive and misguided at best. Again, it is worth remembering here that there are always at least two ways to proceed toward a goal. The top-down approach starts at the top and is the province of what I would generously call the easier process. It involves identifying the key assumptions and following them to the logical conclusion: given some return/risk preference and a few other assumptions in terms of specifics such as liquidity, taxation, and regulatory constraints, one can proceed to a long-term asset mix that makes sense and should, through time, achieve the investor's goal. The bottom-up approach observes that tackling the overall picture is too complex and unlikely to work; thus, one starts at the bottom, identifies the various goals, works to find a way to defease each of them, and then combines the various individual asset mixes into some overall policy formulation. Goals-based strategic allocation is unabashedly a bottom-up exercise.

The Basic Principle

The fundamental idea, as we have seen in Chapter 5, is that individuals have multiple goals, multiple risk tolerances, and multiple time horizons. Attempting to aggregate all of these into a single, one-dimensional ...