Goal-based investing is an investment strategy that allows investors to set specific financial goals and then create an investment plan to achieve them. As consumers increasingly demand goal-oriented financial solutions, financial institutions need to look for ways to easily implement such solutions to remain competitive. Doing so successfully can also open up previously closed revenue streams.
What is goal-based investing exactly?
Goal-based investing could also be called “outcomes-based” or “results-focused” investing.
In goal-based investing, users choose a precise goal they are trying to achieve – buying a house, paying for tuition, taking a holiday, saving a set amount for retirement – and then tailor their investment strategy around that.
Examples of goals for goal-based investing
The goals for goal-based investing are as wide and varied as the people engaging in it. There are also different time bound elements. These goals could include:
- Saving for retirement
- Paying for a child’s education
- Buying a house
- Building an emergency fund
- Starting a business
- Travelling
- Paying off debt
- Creating a legacy
How goal-based investing differs from traditional investing
Goal-based investing differs most drastically from traditional investing in the following two areas:
- Personalisation
- Oversight and direct control
Personalisation
Goal-based investment strategies are far more personalised, whereas traditional portfolios follow a more general pattern.
The purpose of a goal-based portfolio is to achieve a certain target. To do this, much finer control and understanding of each of the underlying asset classes is required.
Following the traditional paradigm, the investor would likely simply choose a diversified mix of stocks, ETFs, and other asset classes without much direct tweaking involved during the portfolio’s lifetime.
Oversight and direct control
Traditional investors typically follow long strategies, riding the lows without panicking while investing in a diverse set of products to overcome those lows in the long term. It tends to be a “hands-off” strategy where the investor is not much involved, or hires an advisor to occasionally look over the portfolio and make recommendations.
The goal-based approach is far more hands-on and often even uses robo-advisors to algorithmically determine periodically which stocks to invest in that might provide more immediate returns, depending on the immediacy of the goal.
What are the advantages for consumers?
Consumers can benefit from the following goal-based investment advantages:
Greater control over investments
Goal-based investing can provide consumers with greater control over their investments. As we enter a new era of money management, consumers are no longer simply looking to “have enough money,” but considering what their money can do for them.
Easy-to-use investment platforms now also exist, allowing retail investors to dabble in investing through an intuitive interface, obviating the need for a costly investment manager.
Personalisation of investment plans
In traditional investment strategies, risk tolerance is a key determining factor, often taking precedence over all other factors.
Investment plans in a goal-based investment strategy take into account the combination of the investor’s specific goal, risk tolerance, and time horizon. A goal-based strategy might include both high and low-risk assets to achieve a balance between the goal, time horizon, and risk tolerance.
Ease-of-use
Many financial institutions that offer goal-based investing have digital platforms and robo-advisory services that make it easier for consumers to create and manage their investment plans. For new investors, the concept of “achieving a goal” might be easier to grasp immediately than “investing in a diversified range of stocks that secures long-term growth.”
Other potential benefits
Although not true in every case, some goal-based strategies and platforms can provide:
- Lower entry cost
- Better return (at least immediately)
- More tax-efficient options
Goal-based strategies often rely on robo-advisers which tend to be cheaper than human financial advisors.
Because they are actively managed following the “hands-on” approach, they can result in better immediate returns.
Some strategies will be more directly aligned with creating a more tax-efficient approach if that is what the user wants. For example, retirement-targeted strategies in the UK could recommend investing in a pension plan would might be eligible for tax relief. Also in the UK, investment in the Venture Capital Trust (VCT) – a fund dedicated to helping local businesses – results in tax-free capital gains and 30% tax relief on the amount invested.
There are similar examples across all jurisdictions. When traditional investment strategies fall short in terms of tax savings, they do so because they have either:
- Failed to consider the investor’s specific tax situation and so missed an opportunity to tailor the investment plan accordingly.
- Invested too heavily in taxable accounts (stocks, bonds, mutual funds, and ETFs) such as mutual funds, thereby falling prey to capital gains taxes.
Why is goal-based investing important for financial institutions?
Goal-based investing allows financial institutions to tap into a variety of benefits, such as:
Increased customer retention and loyalty
By offering a goal-based investment solution that works, especially over longer periods of time, financial institutions can retain clients and increase loyalty.
Improved financial performance
As customers invest more into products they feel have been specifically tailored to them, the financial institution can improve its financial performance as the provider of, or broker for, those products.
New revenue streams
The goal-based investing platform can open the door to new revenue streams. For example, the platform can be offered in different tiers, such as basic and premium.
Change in brand perception
By offering a “modernised” way of investing, customer perception of your brand will be improved.
How financial institutions can leverage embedded finance to provide goal-based investing
Embedded finance is an excellent way to add goal-based investing to your offering because this would be done directly through your company’s app or website.
The fastest go-to-market option to implementing such a solution would be to use a third-party investment platform to provide all the necessary functionality to implement a robust solution quickly.
Velexa offers three products that can be brought to market as an integrated investment solution in anything from a few weeks to a few months:
- An API-only solution.
- An investment-as-a-service, branded solution.
- A full-scale front-to-back investment platform solution.
The platform is completely customisable to your needs and so lets you offer goal-based investing as well as traditional investing. This caters to both target markets.
Developing such a solution in-house is a Herculean task, and it also requires regular maintenance and regulatory compliance checks that can eat away from your bottom line if you have to take care of it all in-house.
Velexa provides a turnkey option that takes care of all of the above and lets you get up and running with a goals-based investment platform in no time.
Tamara Kostova
CEO of Velexa tamara.kostova@velexa.com