The Revolution Coming to Financial Services

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As a goals-based investment manager, we believe investment problems and challenges are best addressed in the context of an investor’s goals—the purpose behind their investment programs. By aligning investment solutions with investor goals, investors have a better opportunity to measure the actual “real world” outcomes they seek.

Each investment-related goal consists of three stages—accumulation (or the Gain stage), preservation (or the Protect stage) and distribution (or the Spend stage). Importantly, investors face different primary risks in each of those three stages.

  • A reasonable risk metric for the Gain stage is volatility. The mathematical rationale behind why volatility as a measure of risk can be valid under the proper conditions is well-understood by the financial services industry in an efficient frontier or mean-variance framework. However, we suggest an additional behavioral explanation for why volatility is an appropriate definition of risk for the investor in the Gain stage.
  • For the Protect stage, a better metric for risk is drawdown—absolute loss. While volatility can accompany investment losses, it is a secondary effect. Defining risk-as-drawdown provides a much more straightforward treatment of the primary risk during Protect stage of the investment journey.
  • The investor in the Spend stage with ongoing expenses (such as paying for expenses in retirement), we designate longevity as the primary risk. Thinking in terms of longevity can provide startling insights as to the type of investment management strategy and the type of portfolio construction that can best address this risk.


Ultimately, the fundamental definition of risk must change and adapt over time as investors transition into a new stage of their goals-based program. Likewise, the investment strategies and portfolio construction decisions aimed at mitigating risk must also change and adapt to each new stage. A portfolio in the Gain stage should have different characteristics and attempt to mitigate different risks than should a portfolio in the Protect stage or in the Spend stage, for example.

This approach stands in contrast to traditional methods of portfolio construction and management that treat risk in more static ways. These methods do not, in our opinion, maximize the probability of investment success. That is, we do not believe that they do nearly as good a job as goals-based investment strategies do at seeking to ensure investors will meet or exceed the financial goals that are the fundamental drivers behind their decision to invest in capital markets.

To get the full story download our white paper, Redefining Risk The Revolution Coming to Financial Services

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