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Measuring the Value of Providing Good Financial Advice

Most planners do a lot more than select investments. So how do you measure the value of providing financial planning?

Looking at alpha and beta when measuring investment outcomes isn’t enough. Enter Gamma, a concept from Morningstar designed to measure the value of good financial planning.

Investors, and perhaps even some advisors, tend to be overly focused on investment performance, says David Blanchett, head of retirement research at Mornignstar. “In reality, there are a lot of other factors that go into helping someone achieve a goal.”

In this context (not in the context of the Black-Scholes options pricing model), Gamma aims to quantify the benefit of the other factors that go into good financial advice, says Blanchett. While beta has to do with market exposure, and alpha takes into account manager skill, Gamma looks beyond these two measures offering a “more holistic perspective on value,” Blanchett says.

In a paper introducing the concept, Blanchett, and Paul Kaplan, director of research for Morningstar Canada, look at five components of financial advice including optimal asset allocation, dynamic withdrawal, the use of guaranteed income products, tax efficiency and portfolio optimization.

While selecting an asset allocation is a big part of a planner’s job, it is usually done by taking into account other investments and insurance needs. “There’s often a misconception between what people think they pay an advisor for and what they are getting,” Blanchett says. “Gamma demonstrates the value of what the advisors are doing.”

Blanchett will expand on this topic at one of the sessions at this year’s annual Morningstar Investment Conference in Chicago on Wednesday. Other sessions will cover ETF managed portfolios, alternative investment in practice, the yield conundrum, the challenging retirement landscape and more.

The lineup of keynote presenters include John Bogle, founder of The Vanguard Group, Ron O'Hanley, president of asset management and corporate services for Fidelity Investments and Carl Richards, director of investor education, The BAM Alliance.

To follow the action live, look for updates on Twitter using #MIC25.

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