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Gamma: How Financial Advisors Add Value

20 November 2020 Consolidated Wealth
Colin Long, Director / Advisory Partner at Consolidated Wealth

Colin Long, Director / Advisory Partner at Consolidated Wealth

The five principles used to measure your advisor’s financial planning decisions

Personal investment management can be a minefield. As your net worth increases, financial decision-making becomes more complex. This is when professional advice is essential as a good advisor will manage your investments and look beyond your assets. But how do investors measure the value they receive from broader financial counsel and not just on investments?

According to Colin Long, a Director and Advisory Partner at Consolidated Wealth, the measure used to give investors an idea of the value delivered by making astute financial planning decisions is called “Gamma”.

Colin explains: “Gamma defines the additional return that one can enjoy through good financial advice. The gain generated by Gamma is supported by techniques acquired through study and experience. Simply put, financial advisors with the most skill and experience can generate the most Gamma for a client.”

Colin zeroes in on five Gamma principles that impact financial decisions:

1. Total Asset Allocation

This refers to the getting the highest return from your portfolio with the least amount of risk. To achieve this, you need an advisor who has the necessary tools, resources and expertise to develop and maintain a holistic asset allocation. A recent study found that 94% of investment returns come from asset allocation. Only 2% came from market timing and 4% from stock picking. Your advisor is responsible for managing this as markets change so it’s important they review your asset allocation on a regular basis.

2. Dynamic Withdrawal Strategy

When clients retire, they have approved funds, money from a pension or provident fund or a retirement annuity that they generally invest into an annuity. The balance of their portfolio is invested into discretionary funds such as shares, cash, unit trusts and endowment policies. These two pots are used to provide a monthly income but any withdrawals are taxed very differently. A good financial planner will build a dynamic withdrawal strategy tailored for your individual situation – investing according to your goals and taking into account the tax implications. These are essential steps to make sure your retirement savings last.

3. Annuity Allocation

There are many different annuities but these can be distilled into two main groups, living annuities and guaranteed life annuities. Again, a good financial advisor will consider your priorities, the amount of cash you need to earn from the annuity each month, the tax implications of each annuity option and how long you think you will need income from these annuities. They will focus on cautiously navigating the economic environment and positioning your portfolio for multiple outcomes.

4. Asset location

This refers to how you invest your money in the different investment vehicles. There are two parts to an investment, the tax structure or investment vehicle and the engine or the investment strategy. The choice of investment vehicle has a significant impact on an investor’s taxes and the net return after taxes and a good financial planner will develop a strategy that is oriented towards achieving a specific goal that is also tax efficient and liquid.

5. Liability Relative Optimisation

This principle refers to how you invest your money in the retirement space. At its most basic, it requires advisors to map a client’s expected financial needs against the assets needed to cover them, taking into account the potential higher inflation or other shifts in real-world purchasing power. So ideally, good liability relative optimisation gives you access to cash sitting in low risk investment structures as well as a long-term portfolio made up of equities. Correctly structured by a professional advisor, this will give you a more sustainable income which in turn provides better financial stability and security.

So next time you meet with your advisor, ask them if they are a Certified Financial Planning Professional and give them a quick quiz on the five Gamma principles. It’s your money and your retirement – so don’t you want to know that it’s in the best hands?

Quick Polls

QUESTION

Which of the following business models do you favour to achieve a sustainable succession outcome in your financial advice practice?

ANSWER

[a] I will find an independent financial planner to buy my business
[b] I will sell a portion of my advice practice to a large corporate
[c] I will join a large firm and give up my independence
[d] I will invite another independent financial planner to join me
[e] I will partner with a large firm
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