Morningstar works with thousands of financial advisers globally and we feel that using our tools and research and applying our philosophy of prioritising end-investors can help advisers better serve their clients. Morningstar was founded because we felt it was unfair that people did not have access to the same information as financial professionals. We want to empower individual investors to take charge of their own financial outcomes—either by directly investing themselves or by having access to independent research that can be used to validate advice from their advisers.

What is a goal-based total-wealth approach to financial planning?

At Morningstar we believe in putting the investor—rather than the investment—first. We think today’s investors are concerned with more than beating the market. Our approach looks beyond investments and retirement and instead prioritises all your major financial goals. 

Following are four examples of considerations you should make prior to investing: focus on goal attainment; total wealth approach; risk; portfolio construction.

We provide two scenarios for each:

  1. Working with an adviser The first scenario is for individual investors who want to use an adviser. Morningstar works with thousands of advisers around the world to help them provide better financial outcomes for their clients. There are many ways of providing goals-based and total wealth-focused advice, but the elements we have outlined should seem familiar if your adviser is following a similar philosophy.
  2. Independent investor The second scenario is for independent individual investors who do not want to use an adviser but still want the benefits from a systemic approach to financial planning. This would also apply to individual investors who want to do their own work to test and validate their adviser’s recommendations.

A focus on goal attainment

Working with an adviser

The focus should be on long-term goal completion rather than on the performance of the investments that make up a portfolio.

The tone should be set from the first meeting with the adviser where the discussion should be about you, your family and your goals.

Additional meetings and communications from your adviser should follow the same script. Updates should focus on progress against milestones to achieving your goals and not on the performance of investments.

Remember that the actual investments in your portfolio are a means to an end and nothing more. Beware if the adviser rushes to complete a regulatorily-mandated risk tolerance questionnaire so he or she can start talking about all the great investments you can buy. Your hopes and dreams matter more than the answers to hypothetical scenarios in the questionnaire.

Independent investor

There is no need for an adviser to be involved in the process of defining your goals. That said, it is important to acknowledge that many people struggle with defining goals because it requires thinking about the future in a very specific and concrete way. To derive the benefits that come from goals-based investing it is critical that you, or you and your family, set aside some time to have this conversation.

Make sure that your goals are concrete—think when, what and how much each goal will cost (remember this is a future cost and must account for inflation).

Morningstar provides our Premium members with the Morningstar Portfolio Construction Guide, to assist independent investors with the goal definition and tracking process. You can also set and save your goals and calculate the required rate of return to acheive them usingn our goal tracking feature. 

A total-wealth approach

Working with an adviser

Context is a crucial component to financial planning. To establish the appropriate context the adviser must understand more about you than just the contents of your portfolio.

Before any conversation about investments, the focus should be on your career and prospects, your age, where you live, your family circumstances and any specific personal circumstances. This will allow the adviser to understand your total resources and limitations which will provide a clearer perspective on what it’s going to take to accomplish your goals.

You should be wary if the first question your adviser asks you is how much money you are looking to invest.

Independent investor

Again, this is a case where the adviser is not necessary for the conversation. Many people struggle with the level of self-reflection necessary to get value out of this exercise. The key is to look at aspects of your life and honestly reflect on any potential ramifications on reaching your goals. Everyone is unique but below are some of the possible things you should consider:

  • Your career: What factors could influence your salary and employment that are outside of your control? Is your job in a highly cyclical industry where a downturn could result in salary reductions and layoffs? What are the prospects for future increases in your income? What is the longevity of your career? What are your core skills and are they at risk for automation?
  • Family: Are there potential dependents that you may have to support—adult children, aging parents, etc.?
  • Where you live: We often hear about inflation on a national level but there are many local and personal factors that may impact your expenses—real estate prices, the impact of rising interest rates, etc.

Risk

Working with an adviser

The way your adviser defines risk is a crucial indicator of their overall philosophy of delivering financial advice.

We believe the common practice of focusing on risk preference doesn’t paint a complete picture. Your adviser should do more than simply ask you how you feel about taking risk (which is commonly done through a risk tolerance questionnaire).

Conversations with your adviser should focus on risk aversion—the amount of risk you should take given your available resources and the goals you want to accomplish. This is a far more complete picture of risk than just focusing on than the amount of risk you want to take.

The amount of required risk and your goals are fundamentally linked. The reason you invest in the first place is to meet your goals. The act of investing is a trade-off between risk and return. Taking on less risk with your investments may increase your risk of not reaching your goal.

Independent investor

For independent investors the question of risk is not something that needs to be viewed in isolation. When investing your own money there is no compliance department or regulator to ensure an adviser has considered the risk tolerance. There is also no need to shoe horn people with very different circumstances into the same portfolio based on a common risk tolerance.

When focusing on goals the real risk to be assessed is the risk that you do not meet your goal. Only you can assess what that means. For instance, not meeting your retirement goal means that you may have to work for a few more years or cut back on your lifestyle in retirement. The good news is that being actively engaged in your portfolio and assessing performance using progress against goals allows you to make course corrections along the way.

A good way to determine how you are tracking against your goals is to look at the required rate of return necessary to reach the goal. If the required rate of return to meet your goal is unrealistic based on historical market returns you may need to reassess. Conversely, if the required rate of return is low you may be able to achieve your goal with a more conservative portfolio.

Morningstar provides our Premium members with the Morningstar Portfolio Construction Guide, to assist independent investors with the goal definition and tracking process.

Portfolio construction

Working with an adviser

Selecting invests should be the last step of your initial work with your adviser. As previously stated, the actual investments should only be selected once your adviser understands your circumstances and your goals have been clearly defined.

To understand how your adviser selects investments you can ask them how portfolio choices align to client profiles. It is operationally easier for an adviser to just have a single asset allocation target for each risk level. It is also unlikely that this approach will serve you well. Different goals have different risks and that should all be incorporated into the portfolio selection process.

As we described in the overview section of this guide, much of the public and regulatory scrutiny of advisers has been based on selecting investments that serve their interests rather than yours. A good adviser should be open to discussing why a particular investment was selected. One way to get reassurance is to validate the recommendation against an independent opinion. All advisers have access to independent research, with 60% of them having access to Morningstar research. Ask your adviser for a second opinion.

The asset allocation and investments in your portfolio should change as you make progress towards your goals—they should not remain static simply because your risk tolerance has.

Goals-based portfolios often have a “glide path” that details how they should change over time. Remember that you have multiple goals with multiple time horizons and the investments dedicated to funding each of these goals can be very different (short-term vs. long-term).

Independent investor

Constructing a portfolio and picking investments is not an area where advisers typically add much value. That of course doesn’t make it an easy process for independent investors. Portfolio construction is a two-step process. First, an investor must determine the asset allocation of the portfolio, or what types of assets should go into the portfolio. Then individual investments are selected within each of those asset classes.

The first step is to select an asset allocation target for each goal. To assist with this process Morningstar has multiple guides and tools, including five different defensive/growth asset class combinations related to five different levels of risk. These can be found in the following areas:

  1. Morningstar Portfolio Construction Guide
  2. Morningstar Asset Allocation models

The second step is to select the underlying investments. Morningstar provides independent research on more than 1600 global equities and 450 funds, ETFs and LICs in Australia and New Zealand. Our research can be accessed via Morningstar Premium and we have several tools that can be used to identify our top rated investments. These can be found in the following areas:

  1. Our Discover Investments tab can be used to access all of our research and includes our Global Equity Best Ideas and stock, fund and ETF filters. 

To learn more about how to marke better investment decisions read the Morningstar Guide to Better Investing Outcomes