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Back You are here: Home Market Market Update Insight The value of Financial Advisers: 1.82%p.a.

The value of Financial Advisers: 1.82%p.a.

A research study from Morningstar Inc. gives investors an idea of the added value of financial planning: An extra 1.82% per year.  Morningstar quantified how much additional retirement income investors can generate by making better financial-planning decisions.

Morningstar calls the measure “Gamma” – is “the extra income an investor can earn by making better financial decisions.” Put another way, it is the potential value that could be added by someone who feels they can’t do this on their own and must hire an adviser for counsel.

In the research paper, Morningstar researchers zeroed in on five key financial-planning decisions — though Blanchett noted that it actually applies to virtually everything advisers do.

MP900177750The five key decisions boil down to asset allocation, withdrawal strategy, tax-efficiency, product allocation (the use of traditional investment products versus guaranteed-income products), and “liability-driven investing” (which is investing with an eye toward an investor’s specific goals, needs and timeline).

Through simulations, Morningstar’s researchers found that a hypothetical retiree could generate nearly 30% more income using a Gamma-efficient retirement-income strategy.

That’s equal to kicking up the annual arithmetic return by 1.82% compared to the average person making those same decisions.

It should be highlighted that what the research showed is that the ability to deliver extra income — unlike the ability to beat the market — is completely predictable. Take certain steps — what Morningstar calls “following an efficient financial planning strategy” — and you achieve excess returns.

Reference:  Marketwatch, Chuck Jaffe, 2012-09-26, “Are Financial Advisers Worth Their Fee?