Goals Are the New Blueprint for Portfolio Construction

Portfolio construction these days is less a matter of what and more a matter of why.

As advisors put greater emphasis on financial planning, they’re moving beyond traditional asset allocation toward what might be called outcome allocation. The two approaches can overlap, but the latter puts the individual client’s goals at the center of the process. 

“Historically, portfolios were built around labels: US equity, international equity or fixed income,” Mayank Goradia, head of portfolio construction at Fidelity, said during a midyear review. “Increasingly, advisors are starting with the investor objective, and then determining which combination of tools can best help them achieve that outcome.” That could mean focusing on income, tax efficiency, downside risk management, growth or wealth transfer, he added. “We’re seeing this marriage of financial planning and portfolio construction.”

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In a financial world full of cryptocurrencies, alternatives and emerging private market assets, it can be easy for clients to get distracted by shiny new objects. While those investments can play a role in a portfolio, they shouldn’t necessarily drive its construction.

“Asset allocation is still important, but it is the means, not the objective,” said Scott Bishop, co-founder of Presidio Wealth Partners. “The real objective is to build a portfolio that produces the income, growth, tax efficiency, liquidity and risk profile the client’s financial plan actually requires.”

The shift toward outcome-oriented strategies comes as advisors have largely resisted getting more defensive this year:

• Average equity allocations remained above 70% while fixed income stayed at 23%, Goradia said.
• Advisors boosted their allocations to US equities while slightly lowering exposures to international stocks. They also ramped up their allocations to active ETFs.

Everything in Time. Eliot Weissberg, president of the Investors Center, uses a variation on the bucketing approach he developed that’s organized around phases of a client’s life and their priorities. “Target-date funds were the beginning of outcome-based investment,” he told Advisor Upside. “But it’s time for advisors to step up and do a better job of self-managing how asset allocations should vary over time depending on the client’s circumstances.”