Describing Client Goals

No, actually. This is a client's basic need in retirement.

Suppose a married couple in their mid 40s comes to meet with you regarding their future retirement. It's not only their primary goal, it's all they want to talk about and focus on. But little do you know, that retirement goal actually includes a couple of secondary goals, like buying a car and a second home. As an analyst, you're bound to hear about major financial goals, while some others won't be mentioned, which is dangerous. What do you think should be your necessary approach?

That's right! A basic retirement need should have a probability of success higher than 90% because it covers basic living expenses. That's a definite need. On the other end of the spectrum fall dreams, like that mansion for retirement or home improvements that are extras, like a pool. Those dreams will have probabilities of success close to 60%.

Just like the spectrum of probabilities, the needs-to-dreams goal spectrum also has a natural risk association. For example, a 95% probability of success would require a certain risk level versus that huge mansion with a probability of success of 50%. Clearly, one is more important, so which type of goal should take the most risk?

Not so. More risk implies a higher probability of lower returns, which puts needs at risk.

No. Wants still have a higher probability of success.

Yes! Dreams would involve the highest risk-taking ability because they're assumed to take up a small amount of the portfolio while still requiring a lot of capital. Plus, the cost of not hitting the required amount is low, so risk-taking is allowed. Now, compare that to a need goal, which would take significantly less risk to ensure that the goal is met. So, basically, the risk-taking ability runs from low (a need goal) to high (a dream goal).

Not quite. Wishes aren't the most extravagant desire.

To sum it up: [[summary]]

Not so. This goal covers basic living expenses during the retirement phase, not extravagant purchases.

No. Those minor goals may contain some big assumptions.

Clearly, yes! An adviser's goal is to focus on all the client's goals, even the ones that are extreme or minor. Those minor goals can contain funding or cash flow assumptions that the client is confident will be met by a certain funding source, such as a job, inheritance, or even from the portfolio. And remember, in the client's mind, it's no big deal, but it can really impact the asset allocation structure that you develop.

Not quite. That major goal is still the number one priority.

That's why the first step in describing client goals is to separate out goals that have established anticipated cash flows and those that don't have specific details. These unspecified goals are called __labeled goals__ because the client only has one specific label associated with this funding need. For example, the client may have a goal of capital preservation or a certain risk level. Those would fall into labeled goals.

The time horizon process is pretty straightforward for cash flow–specific goals, but other parts of the process are much more difficult, especially when it comes to quantifying data. What part of the cash flow goal development process is difficult?

Not really. That's more of an emotional decision, and most clients know that risk and reward are linked.

Right! Most clients won't know the required probability of each goal, especially in relation to other goals. For example, funding a child's college and funding retirement may seem like a required probability of 100%, but the client may not be able to afford to do both, so the required probability needs to vary between the goals. That's why you may decide to focus on preserving human capital instead of taking such a numerical approach. Essentially, you'll be focusing on the goals that the client wants to achieve and the consequences the client wants to avoid.

No. That's actually an easier part of the process because cash flow goals have an associated funding need.

Through this simplified framework, you can then divide goals into needs, wants, wishes, and dreams. Although it seems pretty basic, this approach allows the client to understand the relevant importance of specific goals. For example, funding a basic retirement would be a crucial need, so what required probability would you assign that goal?

Solely focus on the major goal

Find out all the client's financial goals

Focus on the minor goals that the client doesn't mention

Needs

Wants

Dreams

Wishes

Getting the client to accept risk into the portfolio

Getting the client to quantify the goal's probability of success

Getting the client to identify the amount required to fund the goal

Roughly 75%

Less than 60%

Greater than 90%

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