Earlier this year, Northern Trust unveiled a new goals-powered software solution that its executive believe gives the giant trust company the ability to address affluent clients’ primary financial concerns in ways they can grasp and visualize.
The program represents a major departure from traditional financial planning software that focuses on asset management and risk tolerance, opting instead to take an assets and liabilities approach, assigning specific assets to enable individuals to accomplish various goals.
The approach starts out by defining risk as failure to achieve one’s goals. Many other programs rely instead on risk tolerance questionnaires and subsequent analytics. “It is extraordinarily difficult to define [risk tolerance],” says Henry Johnson, Northern Trust’s East region vice chairman.
Relying on clients’ attitudes to various standard deviation hypotheticals not only frames risk in a way that may be inaccurate; it also can lead to “misunderstandings on the part of the client,” he said.
Northern Trust’s program requires clients to first define their goals and then focus on asset sufficiency. This involves obtaining all asset and liability information, including salaries, spending, bank and brokerage statements, and estate plans.
Many of the trust company’s new clients have at least eight figures, so when they reach asset sufficiency, they can reconsider whether they want to change their goals. Options range from early retirement to increasing charitable contributions to purchasing a second home. If a client wants to be very conservative about future financial returns or inflation rates, the program permits it.
Each goal has a unique pool of assets associated with it. For example, risk control assets such as cash, Treasurys, TIPS and municipal bonds are treated as “something akin to insurance,” assets that can be tapped into during difficult times when clients don’t “want to sell risk assets at distressed prices,” Johnson says.
The Northern Trust model relies on a calculation it calls a bond runway, which essentially multiplies annual core lifestyle spending times the years of lifestyle assets a client wants to protect. Depending on the clients’ goals, they can preserve anywhere from eight to 40 years of lifestyle expenses. Johnson notes this lets them determine “how much anxiety they want to live with.”
But other capital allocation decisions are based on the timing of goals; frequently, equity investments are the best path to achieve them. Typically, a 10-year goal starts out heavily weighted in equities and is gradually de-risked to insulate the funds from short-term volatility.
For the ultra-affluent, it also sparks conversations with clients that can be personalized. If a family “wants to take an extended European vacation every five years,” the vacation can be factored into the plan, Johnson says.
Northern Trust’s underlying model isn’t static—it entails many interdependencies in the way data flows through a client’s plan. That’s because most affluent individuals have multiple measures of success, he says.
Some of the most interesting opportunities arise when a client attains asset sufficiency, as many of Northern Trust’s clients have. At this point, the program allows them to look beyond lifestyle and make other choices, such as whether they want to endow their alma maters during their lifetimes rather than via their estate. That gives them an opportunity to watch philanthropy at work.
