Financial planning based on achieving concrete goals is effective. According to research published in 2015 by David Blanchett, head of retirement research for Morningstar’s Investment Management group, using a goal-based framework in financial planning can lead to a 15% increase in investor wealth.
In addition to returns, investors gain a sense of motivation and satisfaction with their financial plans when advisers focus on a client's personal goals over arbitrary parameters.
For planning to be successful, however, investors need goals that are concrete and achievable. Asking investors outright what their goals are is not necessarily the answer either. Investors may give seemingly reasonable answers, but evidence suggests the knee-jerk responses garnered from those questions may not result in outcomes that are truly important to them.
These are “blind spots”, and they can result from behavioural biases we all share. They undermine even the best financial plans, or at the very least result in financial plans that do not accurately represent investors’ preferences and precise motivations.
The Master List
Surprising nobody, this is a huge hurdle to successful planning. In 2018, Morningstar conducted an experiment (in the US only) to see if a simple behavioural nudge (in this case a general list of common goals) could help investors better identify what was really important to them.
Our analysis suggests using a general list of common objectives can be an effective way to start this process. Such lists have been shown to improve the identification of preferences in a variety of areas.
To simulate the typical goal identification process, Morningstar’s behavioural scientists asked research participants to list and rank their top three financial goals. They then added their self-reported goals, in random order, to a master list of common financial goals, creating a combined list. After viewing this combined list, participants were then asked to rank all financial goals in order of importance. Check out the example below.
On average, 26% of the participants changed their main goal after seeing the combined list. The master list was even more effective in a multi-objective scenario: around 73% of participants replaced at least one of the first three objectives with those from the combined list. This means only 27% of participants retained all of the first three initial financial goals, highlighting a flaw in the traditional goal-setting approach.
Stranger Unto Yourself
Once they realised the master list had a significant impact on investors’ prioritised objectives, Morningstar analysts asked what changes the combined list had caused. They found many people seemed to prioritise more personalised and emotionally-rooted goals after seeing the master list. The use of a master list seemed to push investors towards more specific goals too.
Finally – and as we suspected from previous research – retirement was found to be the most important financial goal. In fact, it was ranked as the most important goal two and a half times more often than any other goal. For many investors, retirement is still a central pillar in their financial plan.
What the exercise showed is that people can sometimes be strangers unto themselves. Helping investors make good choices and develop plans that make long-term objectives possible should be one of a financial planner’s key missions, and our research found that master-list nudges might help guide investors toward the goals they really want.
