Great financial planning finally has a value

by Simon Hoyle

Financial planners are familiar with alpha and beta as drivers of long-term investment portfolio returns; but now there’s a third letter to add to the lexicon – gamma – and according to Morningstar, it’s the value created that can be directly attributed to sound financial planning.

Portfolios optimised using five techniques identified by David Blanchett, head of retirement research for Morningstar, generate 23 per cent more income in retirement for the average retiree.

“Advisers do more than just pick great investments,” Blanchett says.

“There’s more to alpha and beta when it comes to the [investment] outcome.

“If you do it well, creating gamma for a client is worth a lot.

“This idea of gamma is that there’s a benefit to advice. Advisers can help individuals, help them accomplish their goals better. This talks about five things [an adviser can do]. It’s important to note that there’s a lot more than five things advisers do for their clients.”

Blanchett’s analysis covers five specific financial planning techniques:

  1. Total wealth asset allocation
  2. Dynamic withdrawal strategy
  3. Annuity allocation
  4. Tax planning; and
  5. Liability-relative optimisation.

“So the question is, ‘So what?’ If you do these five things what does it do for accomplishing their goal of achieving a better retirement?” he says.

“So we ran a bunch of simulations and we find that if you do these five things for retirees, we get 23 per cent more income. For every $100 you could do on your own, without help, you get $123 with help.

“It’s incredibly valuable. Someone who wouldn’t do these things on their own, who doesn’t understand things like annuities or total wealth allocation, has $100. The person with an adviser has $123.

“Then you might say, well advisers charge for their services; they’re going to charge someone a fee to implement this plan, you can say, OK, so what is this worth from an alpha perspective? What would you have to do in terms of picking great managed funds, great individual [stocks] or ETFs, to create the same increase of income?

“You have to do alpha of 1.5 per cent a year for 30 years to have that same improvement.

“So the benefit of financial planning is really significant.”

Value, not cost

Blanchett stresses that while his analysis quantifies the value brought to the table by financial planners, he has no view on how financial planners should charge for the value they create.

The biggest bang for the buck comes from a dynamic withdrawal strategy – it accounts for more than 9 percentage points of the 23 per cent higher income.

Next comes total wealth asset allocation which accounts for about 6.4 percentage points of the 23 per cent of additional income.

A dynamic withdraw strategy simply involves tailoring the annul draw-down from a pension fund to reflect the current economic and investment circumstances, and the outlook. When markets rise, draw down more – but when markets fall, cut the draw-down accordingly. Blanchett says that bizarrely, right after the global financial crisis, when investors’ capital had been depleted, withdrawals actually increased.


Blanchett says that allocating some capital to an annuity or other guaranteed income stream is a sound way to optimise retirement income – but he acknowledges differences in the structure of the markets and the take-up of annuities in the US and Australia.

Total wealth allocation means viewing a client’s wealth holistically.

“No portfolio is an island,” Blanchett says – meaning that this approach is based on finding “the most efficient combination of available financial assets”. A total wealth view has to encompass an individual’s actual financial capital, as well as their human capital (ability to earn an income or replace lost capital), wealth stored in housing, and superannuation or pension assets.

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