Explore how outcome-based investments align client-centric financial goals with specialized strategies, leveraging diverse asset classes and protective structures within the Canadian regulatory landscape.
Outcome-based investments are increasingly popular in today’s wealth management landscape, particularly among advisors seeking to align portfolios with specific client-centric goals. Unlike strategies aimed at outperforming market indices, outcome-based strategies focus on achieving a defined objective, such as preserving capital, providing stable income, or targeting a particular return over a certain timeline. Depending on these objectives, they may incorporate traditional asset classes (e.g., equities and bonds), but commonly use alternative investments, options and other derivatives, or structured products to mitigate risks and enhance returns. This approach makes it easier for advisors and clients to track progress by monitoring how closely the portfolio is meeting personal milestones—whether funding a child’s education, maintaining a defined level of retirement income, or securing the principal for an estate plan.
In Canada, these practices fall under multiple regulatory frameworks. Advisors must ensure recommended solutions conform to CIRO (Canadian Investment Regulatory Organization) guidelines, fulfill suitability requirements, and disclose complex product features. Insurance regulators at the provincial level, as well as the Office of the Superintendent of Financial Institutions (OSFI), oversee products that incorporate guarantees of principal or insured elements, such as Guaranteed Minimum Withdrawal Benefit (GMWB) contracts.
Outcome-based investments share many of the same foundational components as traditional investing but add another layer of customization. Below, we explore the key elements, benefits, and challenges of implementing outcome-based strategies, as well as how they may be applied in real-world situations to meet clients’ unique needs.
An outcome-based investment is a product or strategy built with the primary objective of meeting a specific goal rather than outperforming a particular benchmark. For example:
• Capital Preservation: Protecting principal, potentially with guaranteed structures like principal-protected notes (PPNs).
• Stable Income: Creating monthly or quarterly cash flow, often through structured income funds or GMWB products.
• Targeted Growth: Seeking a specific annualized return over a set timeframe, sometimes using structured notes with built-in downside buffers.
Because the focus is on “achieving a goal” rather than “beating the market,” the success of the strategy is measured more directly against the client’s personal benchmarks—such as required cash flow in retirement—rather than the S&P/TSX Composite or other market indices.
In traditional model portfolios, allocation decisions often start by looking at historical market returns or risk metrics across asset classes. Outcome-based strategies approach the problem from the opposite direction:
Outcome-based portfolios often seek diversification on a deeper level than just mixing equities and bonds. They may incorporate:
• Equity Slices (e.g., Canadian dividend stocks for stable income).
• Fixed Income (e.g., short-duration bonds for capital preservation in volatile markets).
• Alternative Assets (e.g., real estate investment trusts (REITs), infrastructure funds, private equity).
• Structured Products (e.g., notes offering predefined upside potential with partial downside protection).
By combining these instruments in service of a defined outcome, the portfolio can be more resilient to market fluctuations while still targeting the client’s required end goal.
Outcome-based offerings frequently integrate structured or insured products that promise a certain level of protection. Common examples include:
• Principal-Protected Notes (PPNs): Guarantee the return of the original principal at maturity, with possible upside tied to an underlying index or basket of assets.
• Guaranteed Minimum Withdrawal Benefit (GMWB) Contracts: Insurance-based solutions guaranteeing a minimum level of lifetime income while still permitting market participation.
• Equity-Linked GICs: Market-linked guaranteed investment certificates available from Canadian banks like RBC or TD, which protect principal but offer returns connected to equities.
Consider a client looking to fund a child’s post-secondary education in 15 years. They want to ensure that no matter how the markets perform leading up to the start of the child’s schooling, they will have at least $100,000 available. Through an outcome-based approach:
This blend of safeguarding the principal and benefiting from possible market growth results in an outcome-based solution precisely aligned with the stated goal.
Another scenario involves a retiree who requires a minimum consistent income stream of $40,000 per year. GMWB products available through Canadian insurers can offer:
This approach directly supports a retiree’s objective to have stable, predetermined cash flow.
Major Canadian banks such as RBC and TD have specialized outcome-based offerings, including structured GICs and private pools tailored to retirement or estate objectives. For instance, RBC may provide RBC Upside GICs linking returns to a basket of equities while ensuring full principal protection, or TD might offer a structured product that locks in partial market gains while capping the downside. These real-world examples illustrate the robust variety of outcome-based options available to Canadian consumers.
Below is a simplified visual flow of how advisors typically structure outcome-based investments to address client’s goals.
flowchart TD
A[Identify Specific Client Goal] --> B[Determine Required Return & Risk Tolerance]
B --> C[Select Suitable Instruments]
C --> D[Construct Custom Strategy]
D --> E[Communicate \n Objectives and Risks]
E --> F[Monitor Progress Towards Outcome \n (Reporting Milestones)]
F --> G[Adjust Portfolio \n if Needed]
Explanation of each step:
A crucial aspect of outcome-based investments is recognizing that protective structures alone do not eliminate risk entirely. For instance:
• Credit Risk: Investors remain exposed to the creditworthiness of the issuer (e.g., bank or insurance company).
• Complex Fee Structures: Structured notes can include hidden costs or complex fee arrangements that reduce net returns if not carefully evaluated.
• Derivatives Risk: Hedging strategies or built-in options can face valuation complexities, liquidity constraints, and counterparty risk.
• Caps and Participation Rates: Guaranteed or principal-protected products may cap upside potential or limit the participation rate in a rising market, potentially leading to underperformance compared to a conventional equity fund.
Advisors should document these risks clearly, following all relevant disclosure requirements, and ensure that the client’s risk tolerance and needs align with the chosen structure. Marketing materials may promote “meeting goals,” but the client must fully understand any built-in limitations or possible shortfalls.
Outcome-based products often include derivatives or leverage, bringing them within CIRO guidelines to ensure suitability. Advisors must:
• Disclose any embedded derivatives (e.g., call or put options in structured products).
• Describe the structure of insurance contracts (e.g., GMWB fees and provisions) accurately.
• Provide transparent fee disclosure for embedded management expenses, guarantee fees, or performance-based fees.
Products incorporating insurance guarantees (such as GMWBs) are generally subject to provincial insurance regulators and OSFI. Advisors selling these solutions in Canada must hold the appropriate insurance licenses.
The Canadian Securities Administrators (CSA) have published guidelines that focus on the complexity and transparency of structured products sold to retail investors. Advisors should consult resources like the “Structured Products & Retail Investor” page on the CSA website to remain current with best practices.
• Overreliance on Guarantees: Clients may assume absolute safety. Advisors should clarify that guarantees depend on the solvency of the issuing entity.
• Complexity of Derivatives: Educate clients about the use of options or swaps, keeping the conversation accessible and relevant to overall goals.
• Limited Liquidity: Some structured products or insurance contracts impose surrender charges or liquidity constraints. Advisors should assess the client’s future cash flow needs to avoid forced redemptions.
• Fee Impact: Many outcome-based products price in cost layers for guarantees or derivative strategies. Compare net performance—after all fees—with simpler alternatives to ensure true value.
Outcome-based investments can significantly enhance a financial planner’s toolkit to meet client objectives in a direct and measurable way. By structuring solutions around specific milestones—such as retirement income, capital needs for future education costs, or principal preservation—clients gain clarity and confidence in their pathways to success. However, the complexity inherent in derivatives, various guarantee structures, and multi-layered fee models underscores the importance of thorough risk analysis and transparent communication.
Advisors should:
• Start with clearly defined goals and tailor investments around those objectives.
• Incorporate a multi-asset, blended approach, selecting from equities, fixed income, structured products, and alternatives.
• Maintain compliance with CSA and CIRO disclosure requirements, especially when derivatives or leverage are involved.
• Collaborate with licensed insurance professionals where guaranteed or insured products are part of the solution.
• Continuously monitor whether the outcome-based strategy remains on track, rebalance or re-evaluate as clients’ lives change.
Remember that the journey toward an outcome is dynamic; strategies that were once suitable may become less aligned if life circumstances or market conditions change substantially.
1. WME Course For Financial Planners (WME-FP): Exam 1
• Dive into 6 full-length mock exams—1,500 questions in total—expertly matching the scope of WME-FP Exam 1.
• Experience scenario-driven case questions and in-depth solutions, surpassing standard references.
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2. WME Course For Financial Planners (WME-FP): Exam 2
• Tackle 1,500 advanced questions spread across 6 rigorous mock exams (250 questions each).
• Gain real-world insight with practical tips and detailed rationales that clarify tricky concepts.
• Stay aligned with CIRO guidelines and CSI’s exam structure—this is a resource intentionally more challenging than the real exam to bolster your preparedness.
Note: While these courses are specifically crafted to align with the WME-FP exam outlines, they are independently developed and not endorsed by CSI or CIRO.