Until recently, there were few formal methods for doing that, but Rudd has come up with one.
The Method
ASI's methodology is implemented in several steps, the first of which is to capture the household financial goals and resources, and then represent them as a household balance sheet, a process that balances a client's marketable resources and the claims against them. ASI has built this process into a separate client Web site called "goalgami." (It is available free-of-charge to advisors on www.advisorsoftware.com.) The name is a portmanteau of the words "goals" and "origami." Like the latter, the Japanese art form that fashions a flat sheet of paper into a sculpture, the process allows an advisor to fashion a flat set of disparate goals into a quantifiable form so that he can develop a comprehensive portfolio strategy, one consistent with the client's risk preferences.
One planner who uses the goalgami Web site with clients is Lex Zaharoff, CFA, the founder and president of fee-only wealth management firm LZ Investment Advisors LLC in Weston, Conn., and a 28-year industry veteran. Goalgami helps Zaharoff because he says that clients' goals are usually fuzzy in their initial meetings. That's why this part of the process requires the heavy lifting of the clients-asking them to figure out what their real goals are so that the wealth management component can come later.
"Money is personal," Zaharoff says, "and speaking about goals with a client is difficult unless one focuses on the end goals such as standard of living, providing a college education, taking care of elderly parents or building an estate."
A typical question clients ask Zaharoff is, "Do I have enough to retire now?" The goalgami Web site doesn't answer yes or no, because the complexity of the answer cannot be determined solely by any analytical tool, despite its objectivity. Instead, the tool allows the advisor to ask the client, "What happens if you work for another five years?" The additional step in the analysis provides a more informed conclusion for both the advisor and the client.
Zaharoff first asks the clients to use the goalgami method privately, which encourages them to figure out what their goals are without being intimidated by him or feeling that he is intruding. After that, they can come back in a month and he can review the issues with them.
Advisors don't have the luxury of taking an infinite amount to time to analyze a client's goals. Because the user interface helps the client participate in the process, it leads to a more balanced asset-liability match.
"Essentially, Andrew took classical tools used in institutional work and applied them to personal finance," says Zaharoff. This is especially important because of the difficulty individuals have focusing on their goals, speaking openly about their spending habits and identifying major spending goals. By integrating institutional tools with the advisory function, an advisor can come up with a more workable investment solution for the client.
Another adherent, Rick Miller, the founder and managing member of Sensible Financial Planning, in Waltham, Mass., believes goalgami's household balance sheet approach is useful because it simplifies the lifetime financial planning problem. He often laments the state of financial planning and portfolio optimization tools. "They're generally not fully integrated," he says. "Most service providers are focused on either planning or investments. Andrew is making the strongest attempt at integrating both."
Constructing the Initial Portfolio
The second step in ASI's portfolio construction approach after displaying the household balance sheet is the wealth management component-which evaluates a client's ability to bear risk by projecting his future cash flows. If there is a surplus of resources to help him meet goals, he will certainly have the capacity to bear risk (i.e., be able to confidently weather a downturn in the market) but depending on his tolerance for risk, he'll be more or less inclined to bear risk. If he's coming up short, on the other hand, he will have a lower capacity to bear risk (i.e., a market downturn will significantly affect his ability to achieve his goals) and he will either need to re-evaluate his goals or adjust his risk tolerance. Once the client and the advisor figure out the risk capacity together, the advisor can come up with an investment strategy, carving out the portfolio most likely to perform within the risk parameters.