Jun 5, 2013

Measuring the Value of a Financial Planner

In a study by Morningstar released last year, the value of “making smart financial planning decisions” was quantified. By diligently researching financial decisions on your own, or working alongside a qualified financial planner to perform this research and analysis, Morningstar was able to estimate the potential benefits to an investment portfolio both in terms of dollars and cents as well as level of satisfaction as it relates the particular financial needs of those saving for retirement. As alpha and beta already have a place in investment analysis, Morningstar coined the term “Gamma” for this new measurement. While the study is fairly technical with plenty of industry jargon, it is worth browsing to review Morningstar’s findings.

The “Gamma” that they determined was from a handful of definitive areas within the financial planning process.

1. Total Wealth Asset Allocation: Basing asset allocation decisions on an entire portfolio rather than a “per account basis” for optimal tax efficiency

2. Annuity Allocation: Determining the value of guaranteed income within a retirement income plan

3. Dynamic Withdrawal Strategy: Drawing monthly or annual withdrawals while taking into considering the most tax efficient accounts based on specific tax situations

4. Liability Relative Optimization: Investing and distributing funds based on an investor’s needs and liabilities (i.e. health care)

5. Asset Location and Withdrawal Sourcing: Drawing monthly or annual withdrawals from the best areas of a portfolio rather than simply drawing on income generated (dividends and interest)

The table below quantifies the increased performance impact on income and return for each area within the financial planning process. This increased performance measure assigns a value to a possible dollar increase as well as the level of satisfaction gained by employing the various strategies mentioned for those saving for retirement.


Gamma Equivalent

Gamma Type

Income Generated


Total Wealth Asset Allocation



Annuity Allocation



Dynamic Withdrawal Strategy



Liability Relative Optimization



Asset Location and Withdrawal Sourcing








Morningstar’s conclusion was that, for every $1.00 in retirement income from a portfolio, employing these strategies could increase portfolio income and satisfaction to a value of $1.29. Or in more representative terms, for every $10,000 in income produced by a portfolio that does not employ the above referenced strategies, a portfolio that does employ these strategies would increase income and satisfaction to a value of $12,880! Furthermore, annual returns could be benefited by an increased value and satisfaction of 1.82%.

As a firm, we have had a long-standing belief that this “Gamma” (overall income, return and satisfaction) existed, but nobody was able to quantify it until now. We are in this business to provide value to our clients and we look forward to continuing to do so for many years to come.

Source: Link to Morningstar Report