Many people struggle with managing personal finances because as their net worth increases, financial decision-making becomes more complex. Although professional advice can help, most investors think that their financial counselors’ only job is to manage their investments. A good adviser, however, will look beyond a client’s assets and provide guidance on taxes, retirement, estate planning, insurance, and more. But how do investors measure the value they receive from broader financial counsel and not just on investments?

The potential benefits from “good” financial planning decisions can be hard to quantify. A recently released study from investment researcher Morningstar Inc. gives investors an idea of the added value of optimizing financial planning decisions – an extra 1.82 percent annually. Morningstar calls the measure “Gamma” (i.e. the third letter in the Greek alphabet) and defines it as “the extra income an investor can earn by making better financial decisions.”

Historically, investors have focused on choosing the “best” money-managers or mutual funds, the ones who “add value” which is the financial world’s way of saying they beat their benchmark consistently. The first two letters in the Greek alphabet (Alpha and Beta) are terms used to describe strategies that attempt to beat the market through specific stock selection and market timing. Numerous academic studies have consistently proven that the “beat the market” and speculative stock picking efforts are impressively and overwhelmingly negative.

Specific investments are less important than many of the other aspects in a client’s financial life and how they impact the portfolio-building decisions. Before the Morningstar study was released, it was challenging to determine the benefit someone receives for this kind of holistic advice with regard to its impact on overall financial well-being. Gamma confirms that there is much more a good adviser should offer other than helping someone pick good funds. The adviser should, rather, look at all aspects of a client’s financial life in order to provide context to the wealth.

 In the research paper, Morningstar researchers zeroed in on five-key planning decisions:


-- Total wealth asset allocation.

-- Retirement withdrawal strategy.

-- Optimization of income streams (e.g. Social Security or pensions.)

-- Tax efficiency.

-- Liability or goal-driven investing.

From a holistic perspective, each of these Gamma concepts may be thought of as actions that need to be taken by an investor or financial planners on behalf of a client.

The most important “takeaway” from this study is that all aspects contributing to Gamma can be controlled by the investor or financial planner. To increase the probability of financial success, we recommend the following:

-- Portfolio asset allocation – The single most important decision you will make in investing. It’s critical to determine the right amount of risk in a portfolio and your financial and emotional ability to assume that risk in time to meet your goals.

-- Retirement withdrawal strategy – Managing a sustainable, tax-efficient portfolio withdrawal strategy in retirement is critical to long-term success.

-- Optimization of income streams – Pensions and Social Security are income streams from which you may benefit as a retiree. Inherent in these benefits are decisions that need to be made that will affect annual income for a lifetime.

-- Tax-efficiency – Smart tax investing and portfolio distribution strategies cannot be emphasized enough. Managing taxes is a component of investing that investors can control so it is important to continuously monitor the affects taxes and tax law changes have on portfolio returns and distributions.

-- Liability or goal driven investing – Investing should be a means to an end for personal and financial goals. Managing a portfolio for short- and long-term goals requires minimizing risks such as inflation and short-term market volatility.

We feel there are other components of successful wealth management to be considered when thinking about Morningstar’s study.

-- Trust in your decision process - In order to trust any decision you make, you either need to research the topic yourself or rely on someone with experience. If you do not have enough information to make a decision or you don’t have a trusted adviser, you will not be confident in your decision.

-- Academic and science based investing – Gain is rarely accomplished without risk, but not all risks carry a reliable reward. Because our goal is to capture the risk/return benefits of the markets, we incorporate the actual science of capital markets, with decades of research guiding the way, into our portfolio strategies. Speculation has no part in this. We target the risk factors that provide higher expected returns, and we incorporate asset class funds into our diversified strategies because they have consistently outperformed both actively managed and indexing strategies.-- Portfolio rebalancing – Portfolio asset allocation is extremely important, but another proven component of successful investing is the proactive monitoring of the asset allocation over time. A proactive portfolio rebalancing strategy can help control the risk of the initial allocation and enhance the long-term returns of the portfolio.

 In conclusion, “Gamma” is a new concept from Morningstar, which they define as the additional value achieved from making more intelligent financial planning decisions. We agree that investors can benefit greatly by making sound, educated decisions in areas they can control. Knowing your available options is the first step in making the best planning and investing decisions for the future....


Heather Cleland, CFP, is a Partner and Certified Financial Planner with Willow Creek Financial Services, Sebastopol, one of the leading wealth management firms in California. For more information go to www.wcfsinc.com or call 707/829-1146. Wealth Matters is a monthly column from the firm’s partners.