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Quantifying an Advisor’s Value

The DIY trend has prompted more than a few people to ask exactly what value human financial advisors provide in exchange for their fees.  It’s a good question.  And thanks to the work of investment researcher Morningstar Inc., part of the answer is clearer to see.

Morningstar looked into the question in 2012 and found that, by working with a good financial advisor, investors can add an extra 1.82% per year in additional retirement income.  Morningstar’s study essentially quantified how making better financial planning decisions results in more retirement income.

Many of us believe that the growth of our nest egg depends on the investments we pick.  The more successful the investments, the bigger our nest egg will grow.  As it turns out, the specific investments in our portfolios are typically less important than several other portfolio-building decisions.

Morningstar’s study looked at a factor the firm calls “Gamma,” which it defines as “the extra income an investor can earn by making better financial decisions.”  It focused on five central financial planning decisions:

  • Asset allocation: The mix of asset classes in an investment portfolio.
  • Withdrawal strategy: When and how distributions are taken from your savings.
  • Tax-efficiency: Minimizing your tax bills over time.
  • Product allocation: Using traditional investment products versus guaranteed-income products.
  • Liability-driven investing: Investing to meet specific goals with specific deadlines.

The study found that “following an efficient financial planning strategy” leads to excess returns over time.  Using that strategy, Morningstar calculated, a hypothetical retiree could generate nearly 30% more income, or 1.82% annually, than a person not following a Gamma-efficient strategy.

Lack of discipline is a real problem for do-it-yourself investors.  Research firm Dalbar found that poor decision-making accounts for a big gap in the average investor’s return versus the return of the S&P 500 stock index.  Over the past 20 years, the S&P returned 9.22% annually, while the average investor’s return was just 5.02%

In my practical experience working with clients over the years, advisors can also add meaningful additional value that is not reflected in Morningstar’s work.  A good advisor can help provide you with so much more:  help in spotting risks and issues that need your attention; thoughtful counsel about how to provide financial support and help with building positive money behaviors for those you love; how to best help family members with special needs; and how to develop purposeful philanthropy, just begin to scratch the surface of more value available to you from a good financial advisor.

The value of an advisor expands with interdisciplinary training and depth of field.  A good advisor can provide collaborative leadership for your other advisors – accountant, estate planning attorney, insurance professional – to help ensure you are benefiting from a whole-system approach to managing your wealth.

Working with an advisor to help you make better decisions can result in more than just peace of mind:  Doing so can result in concrete and quantifiable value and help create better outcomes for those you love and care about.

If you would like to discuss your needs and how we may be able to help you, please contact us.