Practical Applications of Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide

Abstract

In Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide, from the Summer 2020 issue of The Journal of Wealth Management, author Franklin J. Parker (of Bright Wealth Management in Dallas, TX) presents a goals-based system for helping clients allocate assets. Many financial advisors make asset allocation recommendations based on mean–variance analysis, which seeks to determine how much volatility clients are willing to tolerate in exchange for higher returns. But in the author’s approach, advisors ask clients to rank their financial goals in order of importance and value them relative to one another. Advisors then can recommend a wealth allocation to each goal and a different investment allocation within each goal. The aim is to maximize the probability of achieving the given goals, based on the available funds, funding requirements, time horizons, and value of the goals relative to one another.

Parker says this approach allows for a wider range of investment options, since investors with aspirational goals (financial dreams that will not harm clients if not achieved) can invest small amounts in riskier things, such as venture capital, which often fail but have the potential to reap huge profits. This improves investors’ chances of reaching all their goals, from high-priority to aspirational.

TOPICS: Wealth management, performance measurement