Gamma value of using a financial advisor

[67walkon]

Are financial advisers worth their fee? - Chuck Jaffe - MarketWatch

According to this story, the "value" of using a financial advisor, compared to the "average person", 1.82% additional annual income.

"Gamma" is the claimed value of having a paid advisor.

I suspect they are people here and on the Boogleheads site that might disagree with this.

I'm just reporting it, not agreeing or disagreeing.

 

[MichaelB]

Thanks for the article. A web search brought up a link to the original M* paper. here http://corporate.morningstar.com/ib/documents/PublishedResearch/AlphaBetaandNowGamma.pdf The abstract

When it comes to generating retirement income, investors arguably spend the most time and effort on selecting ‘good’ investment funds/managers—the so called alpha decision—as well as the asset allocation, or beta, decision. However, alpha and beta are just two elements of a myriad of important financial planning decisions, many of which can have a far more significant impact on retirement income.

We introduce a new concept called “Gamma” designed to quantify the additional expected retirement income achieved by an individual investor from making more intelligent financial planning decisions. Gamma will vary for different types of investors, but in this article we focus on five fundamental financial planning decisions/techniques: a total wealth framework to determine the optimal asset allocation, a dynamic withdrawal strategy, incorporating guaranteed income products (i.e., annuities), tax-efficient decisions, and liability-relative asset allocation optimization.

We estimate a retiree can expect to generate 29% more income on a “utility-adjusted” basis using a Gamma-efficient retirement income strategy when compared to our base scenario, which assumes a 4% constant real withdrawal and a 20% equity allocation portfolio. This additional income is equivalent to an annual arithmetic return increase of +1.82% (i.e., Gamma equivalent alpha), which represents a significant improvement in portfolio efficiency for a retiree. Unlike traditional alpha, which can be hard to predict, we find that Gamma (and Gamma equivalent alpha) can be achieved by anyone following an efficient financial planning strategy.

The paper looks interesting and worth reading, and the part about financial advisors is a passing mention and not the focus.

 

[Finance Dave]

I did read this at a superficial level....and cannot find significant issues with it. My only concern would be what they call the "base" case. I suspect that many on this forum, as the OP pointed out, do not subscribe to the base case...but rather are a bit more intellectual and wise in their approach to investing.

Thanks for posting.

 

[MasterBlaster]

If an advisor can keep you from doing bone-headed things then they just may be worth their fee.

Remember the tech-bubble, the real estate bubble, and coming soon the bond bubble.

Did anyone get caught up in those ?

 

[pb4uski]

For those who have neither the interest or patience to become proficient in tax-efficient asset allocation (bonds in tax-deferred accounts, other assets in taxable accounts, etc), Roth conversions, optimization of SS, optimization of pension options, etc and a lot of the things that we discuss and debate here at er.org then the benefits of those things may be well worth the cost of a good FA - but then the problem is finding a good FA and separating the wheat from the chaff.

 

[donheff]

The last sentence in the section MichaelB posted applies to many people here:

"Unlike traditional alpha, which can be hard to predict, we find that Gamma (and Gamma equivalent alpha) can be achieved by anyone following an efficient financial planning strategy."

I have good friends who are not at all inclined to learn about investing. They use a fee advisor who saved them a lot of money during the downturn by keeping them from panic moves.

 

[Finance Dave]

If an advisor can keep you from doing bone-headed things then they just may be worth their fee.

This is an excellent point IMO. Often the service I think advisors are best at is not stock picking, but rather keeping people from making the bad errors.

Example? My Mother-in-law, who does not have much money, and her husband (now deceased), had all their retirement savings in US savings bonds. No, I'm not saying that's a "bad error". However, after her husband died, she cashed them all out...in the same year.

As you can imagine, this $150,000 was taxed as if she made that much money, and she lost a significant amount to taxes. Had she consulted me or an advisor, we would have told her to liquidate them slowly over several years (she did not need the money all at once...she deposited it into a bank earning about 2%).

You should have heard her complain about the tax bill. I didn't have the heart to tell her I pay that % of taxes every year due to my income.

 

[Rustward]

Bone-Headed

This year an "acquaintance" (over 59 1/2) took a 401K distribution of somewhere between $195K and $205K to help her son start a business. The son is in his mid thirties and finally has some letters behind his name that he has been working to get since he finished high school -- so he does have a high earning potential, but it will probably take some time to get there.

Judging by the house and other "stuff", she and her DH, who is still w*rking, must have already been in at least the 28% bracket or higher before the 401k distribution, and are surely in the 35% bracket now.

I resisted the temptation to ask what tax planning she might have done before making this move. Even though financial planners do not engage in nitty gritty tax details, I believe even the worst financial planner would have suggested that this 401K distribution would not be the best idea. Maybe I'll hear more about it in April.

I also wonder if this qualifies as a gift, and is taxable income to the son. I doubt they have thought through that, and I suspect the gift will probably go unreported.

 

[Steevo]

If an advisor can keep you from doing bone-headed things then they just may be worth their fee.

Remember the tech-bubble, the real estate bubble, and coming soon the bond bubble.

Did anyone get caught up in those ?

I got caught big time in the tech bubble, WITH the "help" of a paid financial adviser.

In late 1999, amid the euphoria of the tech bubble, we had a financial plan review with our (then) planner, who was connected with the purveyor of my employers 401k vendor. For $750, we got a nice binder with a detailed analysis of all of our investments, recommendations for some minor adjustments in international allocation, etc. Never once did they suggest that the current allocation was rather tech-weighted and should be rebalanced. Even when asked, they felt that it was a good balance for the "new Internet-based business world" we were heading into.

HAH!

When it was all said and done, we were down 50%, and our retirement date moved out 5 or more years.

We no longer rely on a single adviser, and do a lot more individual research and are far more aware of world and market conditions than we were then.