Objectives-based investing requires an adaptive approach, experts say

Objectives-based investing can involve a vast array of products, and it places great responsibility on an advisor to understand a client's risk while pursuing the desired outcome, a panel of experts said on Wednesday at BNY Mellon Pershing INSITE 2019, in Phoenix.

Each phase of an investor's life cycle needs a different approach to investing, said Steve Fox, senior client analytics manager at Capital Group.

For example, an investor in the wealth-accumulation phase might have more allocations to small-cap stocks, which tend to have much greater volatility than large-cap stocks, because that investor can withstand the risk in their portfolio, said Brendan O’Neill, director of advisory solutions at Lockwood Advisors, a BNY Mellon Pershing affiliate.

Objectives-based investing takes many forms, but “where the challenges are is making sure you're using the full tool kit available to you,” Fox said. “Part of it is starting to think beyond risk and returns measured by mean and standard deviation” and making sure that the investing approach is leading to the desired outcome, he said.

The panel also discussed specific types of products and how they can fit within objectives-based investing. Fox and O'Neill said target-date funds are a highly narrow and specific example of objectives-based investing that accounts for only a few variables about a client — much less than what advisors learn through their dialogues about client goals. Nonetheless, TDFs can be a good vehicle for getting people to start diversifying, a step toward discovering a wider range of potential investments, Fox and O'Neill said.

Exchange-traded funds, meanwhile, can coexist with objectives-based investing, but “your approach and thinking has to change quite a bit,” Fox said. Using such passive investments in objectives-based investing places a large burden on an advisor to ensure that the balance of investments is still appropriate for the client, he said.

Meanwhile, whether robo-advisory services can coexist with objectives-based investing depends on a client's comfort level, O'Neill said. A younger investor might be more comfortable with such options, and whether to use such services is ultimately a matter of advisors harnessing technology in a way that provides a good user experience, he said.