1.8% per year.
That is the annual added benefit delivered by financial advisors to their clients according to Chicago based Morningstar, Inc. in a recently released study*.
You may recognize the name Morningstar, a firm that is best known for its analysis of mutual funds, stocks and ETFs. In this role they have built longstanding relationships with financial advisors and have developed a deep understanding of our business.
Meet Gamma – no, this is not a new character in an X-men movie. This is a new measurement Morningstar has created to describe “the additional expected retirement income achieved by an individual investor from making better financial planning decisions”. This is essentially the value a good financial advisor can add which would result in additional retirement income over time.
At Marin Financial Advisors we have long held that investor behavior is more crucial to financial success than investment performance. Applying a discipline and executing on a plan is worth a lot, and the Morningstar research paper identifies five elements that advisors concentrate on that add value. These are:
1. Withdrawal strategy – encouraging clients to keep within sustainable limits of withdrawals identifies problems early and makes adjustments proactively. This was the most important of the five elements in adding value, according to the study
2. Asset allocation – this is the main driver of investment returns. Proper allocation adds diversification, which lowers risk and improves returns. Professional Advisors are not tempted by fund names assigned by marketing departments. They are more inclined to “look under the hood” and know how a fund is built
3. Tax-efficiency – taxes are just another form of expense that can be customized and optimized on a client by client basis.
4. Product allocation – in their study this means the use of traditional investment products versus guaranteed-income products such as annuities.
5. Liability-driven investing – we would call this goal based investing, clients sometimes think of this like “buckets” for different financial needs such as funding a college education or producing retirement income. We ask “when will the money be spent, how much is needed, what is it for?” and plan accordingly.
In the end it is very hard to quantify the value of a service like financial advice. How do we keep track of the bad decisions we did not make? How do we remember how hard it was to make a good decision, like staying in stocks in early 2009, or perhaps not investing in a brother-in-law’s idea for a new restaurant?
Co-Author of the Morningstar study, David Blanchett, said the thing that surprised him the most about the research was the value of annual meetings. This is where clients and advisors tweak strategies, particularly as the client is entering or in retirement; both advisors and clients tend to focus on market results more than the benefits they get from having that sit-down. We at MFA were pleased to see some of the valuable, holistic parts of advice that we concentrate on identified in a study. We know from years of experience the value of being able to have a calm conversation with an informed and objective source.
Is there a topic you would like to see covered in one of our newsletters? Send us your thoughts to advice@marinfa.com
* You can read an article about the study here: http://www.marketwatch.com/story/are-financial-advisers-worth-their-fee-2012-09-26?pagenumber=1 or view the full 27 page study here: http://corporate.morningstar.com/ib/documents/PublishedResearch/AlphaBetaandNowGamma.pdf
