Goals-Based Wealth Management is a wealth management framework that borrows from pension fund management, endowment fund management and behavioral finance to develop a more effective and intuitive system for managing personal wealth.
Traditionally, the financial industry, financial advisors, and academics in finance have associated the notion of “risk” with the standard deviation of an investor’s portfolio. Investors, on the other hand, typically associate “risk” with the likelihood of not attaining their goals. This distinction is important: for example, decreasing standard deviation risk in an underfunded investor’s portfolio increases, as opposed to decreases, the risk of not attaining their goals.
Goals-based wealth management needs to incorporate viewing risk from the investor’s goals-based perspective, as well as the traditional standard deviation perspective.
Traditionally, the financial industry, financial advisors, and academics in finance have associated the notion of “risk” with the standard deviation of an investor’s portfolio. Investors, on the other hand, typically associate “risk” with the likelihood of not attaining their goals. This distinction is important: for example, decreasing standard deviation risk in an underfunded investor’s portfolio increases, as opposed to decreases, the risk of not attaining their goals.
Goals-based wealth management needs to incorporate viewing risk from the investor’s goals-based perspective, as well as the traditional standard deviation perspective.