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How much is a financial adviser worth?

01 October 2014 Hardi Swart, Autus

With the recent introduction of regulation such as Treating Customers Fairly (TCF), and the Retail Distribution Review (RDR) there is now a lot of pressure on financial advisers to be transparent about the fees they earn in relation to the services they provide.

However, this should not be a problem for advisers who have a clearly defined value proposition. But how exactly do you quantify the value you add as an adviser?

Quantifying value

In 2013, a Morningstar paper titled ‘Alpha, Beta, and Now... Gamma’ by David Blanchett and Paul Kaplan was released. The paper attempted to quantify the value of a good financial adviser.

Gamma is meant to be a measure of the additional expected retirement income achieved by an individual investor from making more intelligent financial planning decisions. Therefore, in principle, Gamma is similar to Alpha in that it measures a form of surplus return.

The difference, however, is that Gamma is a result of financial planning decisions, rather than choosing the right investment manager.

Calculating Gamma

In calculating Gamma, advisers focus on five important financial planning decisions and techniques:

- a total wealth framework to determine the optimal asset allocation;
- a dynamic withdrawal strategy;
- annuity planning;
- tax efficient allocation decisions; and
- a portfolio optimisation that includes liabilities.

According to Morningstar, planners can add the equivalent of a 1.82% annual arithmetic return to clients through the five components of Gamma. Over time, that can translate to nearly 29% more that clients can spend at retirement.

Moving away to another area

In a presentation at the Morningstar Investment Conference in June 2013, Blanchett, the Gamma researcher, noted that Gamma was not limited to the above list of five factors. There are actually a 119 different ways that advisers can add Gamma to their client portfolios.

A lot of emphasis is placed on the intangible and emotional benefits of financial planning, for instance supporting your clients through the recession and convincing them to stay in the market and avoid the so-called behavior gap of do-it-yourself-investor underperformance.
Gamma research provides the opportunity to move discussions about the value of financial planning away from being based solely on intangible benefits, and into an area where financial planning makes good financial sense.

Although there might be some criticism about the model, the appeal of Gamma is that it is easier to achieve than standard portfolio Alpha. All it takes is good advice and a smart, structured approach to generating retirement income.

The cost of professional financial advice

Similar to the amount you pay attorneys for the professional legal services they provide, or an accountant to do your taxes, professional financial advisers should also earn a fair wage.

Charges could take the form of an hourly consultation fee, a fixed annual fee or a fee based on the percentage of assets under management or a combination of these. What does matter, however, is that you are providing a transparent and professional service at a reasonable price, and that your clients know exactly what fees they are paying and what level of service they can expect.

Setting expectations from the beginning

Since these services and costs can vary from one financial adviser to the next, it is important for professional advisers to provide the client with a clearly defined value proposition. For example, listing the services the client can expect to receive from the adviser.

Financial planning is not an exact science since every client is unique with different goals and expectations. Diligent and thoughtful professional financial advisers plan and act in ways that seek to increase the Gamma they can add to their client’s financial well-being. By creating at least 29% more for clients at retirement, a significant difference can be made to the lives of your clients, making the benefits far outweigh the costs.

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