Pessimism among wealthy investors has peaked and the percentage of

investors who patiently adhered to long-term investment strategies during

the market downturn was minimal at best.

Even now with glimmers of stabilization peeking out from behind the clouds, wealthy investors still have ahealthy dose of skepticism of the markets. Affluent investors are evaluating their investments and makingchanges based on sound investment advice, but many have failed to contact their advisors for assistance,reflecting a surprisingly high level of dissatisfaction with advisors.

Overall, research suggests investors are losing patience with the markets and the advice they’ve received.This actually creates an opportunity, particularly for advisors who can offer rational ways for investors tosee beyond current market volatility – especially Goals-Based Investing.

Investors’ patience may be at an endDuring October 2008, despite a clear crisis in confidence and significant declines in asset value, more thanone-half of high net worth investors did nothing, according to research from Phoenix International Marketing.They did not make changes to their investment strategies and, perhaps as importantly, the vast majority didnot contact their financial advisor for advice about how to proceed in a time of economic upheaval.1

1 Phoenix Marketing International, October 2008.

Goals-Based InvestingProtecting advisor assets, while helping investors rethink and re-plan

Goals-Based Investing

On March 4, 2009, the newly released SpectrumMillionaire Investor Index® showed that wealthy investorshad become extremely pessimistic about the economy andstock market. The index fell 13 points in February, nearinga record low. This pessimism was reflected in separateresearch from Phoenix Marketing, which showed that,between October 2008 and January 2009, the percentageof affluent investors who were staying the course and makingno changes to their portfolios, dropped from 54 percent to37 percent, as you can see in the below chart entitled,Affluent investors – new realities, new attitudes.2

Nearly every financial advisor knows clients are oftentimestheir own worst enemy – all too eager to make an irrationaldecision that will negatively impact their wealth orjeopardize goals. While one client insists on buying thelatest hot stock after there’s been a run up in price, anotheris panicked by market volatility and is ready to abandon a well-chosen strategy.

Clients making those decisions are acting out irrationalinvestment behavior. Documented by a variety of researchstudies, behavioral finance has assumed its rightful placein wealth management and portfolio decision making.

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0% 10% 20% 30% 40% 50% 60%

Did nothing differently to date

Contacted current investment advisor

Shifted retirement assets to safer option

Bought stocks, bonds, or other investments

Moved assets from stocks to safer option

Pulled assets out of retirement plan

Changed primary investment provider

Changed primary investment advisor

Sought advice for first time

Oct – 08 Dec – 08

2 This chart includes data from two reports published by Phoenix Marketing International, October 2008 and March 2009, measuring the attitudes of affluent investors.

Affluent investors – new realities, new attitudes2

The client chasing a hot stock is engaging in activitiescalled “herding” or “barn door closing.” The investor who’sready to abandon his strategy is experiencing “myopic lossaversion.” And the prospect with baseless opinions isguilty of “overconfidence.” Researchers have identified no less than 14 distinct behaviors, any one of which canunravel an investor’s goals, shrink exit wealth andpotentially damage the advisor-client relationship.

The key to helping clients see through these markets is tohelp them focus, not on daily headlines or commentariesfrom television pundits, but to focus on their financial goals.More importantly, for advisors to help clients, they need tobetter understand investor behavior and incorporate a goals-based investing approach and corresponding investmentstrategies into their client process. This research-basedapproach to wealth management will help you preventclients from engaging in counterproductive behavior.

As you will see, the current market environment presents a timely opportunity for advisors to introduce some freshthinking to their clients and prospects.

Tools and benefits for the advisorAdvisors who adopt the goals-based approach are provideda range of tools to help them communicate and serviceexisting clients during challenging markets and win newclients to help them grow. The SEI Proposal Tool providesclients and prospects a Personalized Wealth Program,which helps them understand the value of selectinginvestment strategies in the context of financial goals anddreams. Services like automated portfolio rebalancing,dynamic portfolio management and industry first “progressto goals” tracking account statements help them see howtheir portfolio evolves over time according to their goals, not a disconnected benchmark. The SEI goals-basedinvestment process can help financial advisors deal withirrational investor behavior.

Advisors who work with SEI confirm the effectiveness ofthis approach. Matt Carpinelli, of AFC Investment AdvisorsInc. located in Denver, CO said discussing goals withclients takes the focus away from beating benchmarks andperformance. “It’s much easier to have a constructiveconversation when it’s about goals versus performance,” he said. Not only do the strategies differentiate him in hismarket, but he’s never lost a client who’s using the goals-based approach. That’s notable given the environment overthe last 18 months.

Larry Dietz of Park Avenue Advisory Services located in South Bend, IN reports a similar client experience in that goals-based strategies have helped to manageclient expectations. “Clients realistically know how eachasset should perform relative to their goals,” he said. “It definitely helps to frame the client’s expectations,which is a must for a long-term relationship.”

Proof of our approach can be found in advisor response.More than 1,100 advisors have adopted the goals-basedapproach over the last few years. Moreover, the severemarket dislocations of 2008 tested the strategies, whichperformed as designed. For example, as of December 31,2008, four of the five Stability-Focused Strategies haveoutperformed the S&P 500 for the one- and three-yearperiods and since inception, with consistently lowerstandard deviation.4

Goals-Based Investing

What is goals-based investing?Rather than focusing on just purely investment management,goals-based investing focuses on a client-centric approachto wealth management. How can an advisor combine thetraditional methodologies of modern portfolio theory withwhat we know about investor behavior?

Foremost, goals-based investing is oriented around theinvestor. The efficacy of an investment strategy is notmeasured just by traditional yardsticks like market indices,benchmarks or standard deviation. After all, these arerelative and often have little real-world meaning to theinvestor. Goals, however, are very meaningful to clients.And that’s what distinguishes SEI’s approach from others.Investment strategies are specifically designed aroundclient goals. Performance is measured by the clientachieving a stated goal. Risk is a function of failing toachieve that goal.

More to the point, goals-based investing recognizes thatinvestors have multiple, often conflicting goals. So ratherthan pool all client assets into a single portfolio, we createa separate portfolio for each goal. Whether the client isaccumulating assets for their retirement, saving for theirchildren’s education, or building a legacy for their heirs,there’s an investment strategy specifically tailored to the goal.

Grow assets while managing riskThe Goals-Based Stability-Focused Strategies, for example,narrow the gap between traditional portfolio theory andbehavioral finance by seeking to grow assets within atargeted range. The top of the range equals the strategy’shighest historic value and is adjusted as the fund reachesnew highs. The lower boundary is a fixed percentage belowthe ceiling: 10%, 20%, and 30% for the Defensive,Conservative and Moderate Strategies, respectively. Raisingthe lower boundary as the portfolio grows helps to protectyour client’s principal, not just the original investment, andcombats the investor’s tendency to increase his tolerancefor loss as the portfolio grows.

By applying behavioral finance to portfolio construction wehave aligned risk management with the investor perceptions.These strategies seek to maximize their growth relative topredefined risk thresholds.3 This enables your investors toselect a strategy consistent with their goals, help reducerisk and discourage them from making rash decisions withevery market downturn.

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3 Based on SEI’s base case assumptions for asset class returns, risks and correlations there is only about 1% probability of a strategy violating its threshold,which means it takes into account 99% of all expected outcomes. There is no guarantee that the objectives will be met.

4 Source: SEI (DataMart monthly returns). The performance data quoted represents past performance. Past performance does not guarantee futureresults. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more orless than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the mostrecent month end, call 1-800-DIAL-SEI.

markets and stocks. We know, however, that is not alwaysthe case. Most investors have too little information and aredriven, not by what they know, but what they feel. Rationaldecisions are all too often pushed aside by irrationalbehavior.

The following page shows a catalog of the more commonbehaviors and how our goals-based approach can helpmanage them.

Goals-Based Investing

Dealing with investment behaviorA wealth management strategy built around specific goalsoffers multiple benefits, not the least of which is its valuein addressing sub-optimal behavior. Bad decision makingis often a function of a lack of information, which is themajor shortcoming of traditional investing. HarryMarkowtiz’s landmark work on “Portfolio Selection” in 1952led to Modern Portfolio Theory and “efficient portfolios” –for decades the bible of investment practitioners.5 Manyfinancial behaviorists have identified what they view asfundamental flaws in this approach. Building an efficientportfolio under Modern Portfolio Theory assumes theinvestor has perfect information about the economies,

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5 Much of the discussion about investor behavior is from “Explaining Apparent Stock Market Anomalies: Irrational Exuberance or Archetypal HumanPsychology”, Clint Tan Chee Leong, Michael J. Seiler, and Mark Lane, 2002.

Maximum Drawdown measures a portfolio’s peak to trough using monthly returns since inception of the investment strategy. As a portfolio grows it will continually set new highs and this risk metricenables an investor to get an estimate of the largest loss a strategy has experienced over its life.It’s backward looking, so like any statistic it can only provide an estimate of what to expect in thefuture since market dynamics can change.

*** Drawdown has been calculated using monthly returns.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. It is calculated as the square root of variance.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principalvalue of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current perform-ance may be lower or higher than the performance quoted. For performance data current to the most recent month end, please call 1-800-DIAL-SEI.

As of 3/31/2009

Goals-Based Investing

HerdingThe tendency to imitate others, driven by the belief they haveinformation that justifies their actions. This creates a feeling ofsafety in numbers and leads to jumping onto a hot stock. Thiscauses the stock to initially rise in value, followed by “valuevaporization.”

OverconfidenceInvestors tend to overestimate their knowledge and predictiveability, resulting in excessive, irrational trade volumes or “noisetrading.” Believing they cannot be wrong, investors refuse toadjust their views in the face of contradicting evidence.

Myopic loss aversionInvestors pay more attention to short-term ups and downs ofthe stock market and forget its long-term direction has beenup. As a result, an investor might sell a potentially long-termwinning stock that has under-performed short term.

Hindsight bias and prideInvestors tend to recall their successes but not their failures,and attribute success to their intelligence, and poor decisionsto bad luck. Success tends to encourage further investing,especially in a bull market.

Barn door closingInvestors tend to try to reproduce past market success bybuying into a stock whose price has been on an upswing, whichwill hurt the irrational investor if the stock price has peaked.

AnchoringDecision makers tend to form and anchor on strongly heldopinions and are reluctant to revise their views in the face ofnew and contradicting information.

Regret aversionThe loss-averse investor tries to manage his risk of regret. Heholds the view that as long as a loser stock is not sold; any lossis on paper only. As a result, he is reluctant to sell losers andhopes to see it bounce back.

Nontransivity and question framingNontransivity suggests that the order in which investors look at stocks affects their choices. Additionally, investor responsedepends on how a question is presented; framed differently,the same question would result in different responses from the same investor.

Over- or under-reactionInvestors tend to overreact or under-react too late to newinformation while waiting for confirmation.

Investor Behavior How SEI Goal-Based Investing Can Help

More confident in a goals-based, wealth-management strategy,the investor is less swayed by public opinion.

Irrational overconfidence is displaced by a clear vision of where the investor is headed and his strategy for getting there.

Goals-based investing keeps the investor focused on the long-term. They feel less pain of financial loss knowing they’re ontarget for achieving long-term goals.

Committed to a holistic approach to wealth management, theinvestor is neither focused on individual decisions, nor engagesin “noise” trading and market timing.

As a rule, goals-based investors are rational investors. They arenot chasing returns and understand success is a function ofmeeting goals.

Investor is more willing to let go of bias knowing that, right or wrong, the important thing is achieving a goal.

Investors are not obsessed with picking winners or losers.The only “win” is attaining the objective.

“Order” and “framing” are irrelevant. The investor has chosena path of wealth management versus investment management.

Investors who zero in on what matters most – achieving goals –are generally less reactive.

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Benefits for the investorLet’s not forget who most benefits from making solid,rational decisions – the investor. Committed to a programof long-term wealth management, focused on achievingspecified goals, the investor will build confidence,maintain a proper perspective and discipline and remainfocused on the ultimate prize – achieving lifetime goals.

If you’d like to hear more about SEI’s goals-basedinvesting programs, we invite you to call one of ourPractice Consultants today at 1-888-SEI-ANSWERS (1-888-734-2679).

Goals-Based Investing

Reaping the benefits The benefits of goals-based investing may be self-evidentafter reading how it promotes more rational behavior.Nevertheless, it’s worth detailing how our programs willdifferentiate you in your market. Nearly all investmentcompanies are telling the same story the same way:lumping assets into a single portfolio focusing oninvestment performance and then fighting an often losingbattle with counterproductive behavior. Working with SEI,you’ll look different, sound different and your clients willbehave different.

Beyond differentiation, goals-based investing will help todeepen the advisor-client relationship, especially duringmarket upheaval. A 2008 study by British-based BarclaysWealth showed market volatility increases the likelihood ofa client changing advisors. More than 23 percent of clientssurveyed in the United States said they were more likely to switch advisors during tough times.6 Ask yourself this:What’s the likelihood an investor will leave you if he (1)has reasonable expectations, (2) understands his goals,and (3) is confident in eventually reaching them?

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About the SEI Advisor Network

The SEI Advisor Network provides financial advisors with turnkey wealth management services through outsourcedinvestment strategies; administration and technology platforms; and practice management programs. It is throughthese services that SEI helps advisors save time, grow revenues, and differentiate themselves in the market.

With a history of financial strength, stability, and transparency, the SEI Advisor Network has been serving the independent financial advisor market for more than 15 years, has over 6,100 advisors who work with SEI, and morethan $27.6 billion7 in advisors assets under management. The SEI Advisor Network is a strategic business unit of SEI.

1 Freedom Valley Drive, Oaks, PA 19456 -1100

1-888-734-2679

www.seic.com/advisors

6 “Breaking the Mould, a Question of Personality,” Barclays Wealth, 2008.7 As of 12/31/08

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon bythe reader as research or investment advice.This information is for educationalpurposes only.

There are risks involved with investing including possible loss of principal.There is no guarantee the objectives of the strategies discussed will be met.

Services provided by SEI Investments Distribution Co (SIDCo) and SEIInvestments Management Corp (SIMC). SIDCo and SIMC are wholly ownedsubsidiaries of SEI Investments Company.