Morningstar Magazine - June/July 2017 - 56

Spotlight: The Future of Investing

EXHIBIT 1

Seven-Question Framework Each aspect of planning has value in building
a gamma-efficient portfolio.
Benefit of Financial Advice (%)

important, they are only one aspect of
accomplishing a financial goal.

Low

Average

High

1 Why invest at all?

0.05

0.30

1.00

2 Which type of account is best for my situation?

0.10

0.25

0.50

3 What is the appropriate risk level?

0.10

0.40

1.00

4 Which asset classes should be included?

0.00

0.20

0.60

5 How does the risk of the goal affect how I invest?

0.05

0.20

0.50

Investment Cost

0.00

0.20

0.60

Investment Quality

0.00

0.10

0.30

Tax Considerations*

0.00

0.15

0.60

Rebalancing

0.00

0.05

0.10

Investing for the Long-Term

0.10

0.50

1.00

Tax-Loss Harvesting*

0.00

0.10

0.50

~0.40

~2.45

Significant

6 What investments are right to help me reach my goal?

7 When should my investments be revisited or rebalanced?

Total

*Tax considerations will not be relevant for many investors, and even if so only for a portion of the investable assets.
Source: Morningstar.

When Should My Investments Be Revisited
or Rebalanced?
Revisiting the portfolio is an important aspect
of implementation to ensure it remains consistent
with the underlying goals and objectives of
the investor. At a minimum, assuming the client's
goals and objectives have not changed,
the portfolio should be rebalanced annually.
Additionally, advisors can provide important
guidance to clients to prevent them from making
poor market-timing decisions as well as provide
services like tax-loss harvesting that can
increase the effective rate of return of the portfolio.
The Total Value of a Gamma-Efficient Portfolio
E X H I B I T 1 summarizes our estimates of the
benefit, expressed as an annualized performanceequivalent, for each aspect of the planning
decisions that we considered in this research. For
more information about the calculations, see our
complete paper on this subject.6

The results suggest there is a significant benefit
from financial advice, depending on the financial
ability and needs of the investor. The benefit is
also likely to vary by question. For example, some
investors may be very good at selecting
investments and building a good opportunity set,
yet may be bad at revisiting the portfolio and
determining the appropriate risk level. Therefore,
it's important to understand each investor's
preferences and situation before describing the
benefit as low, average, or high.
Even investors who could do a good job on their
own may derive some benefit from working
with an advisor on portfolio decisions. A note
about the results in EXHIB IT 1 is that they are only
related to portfolio decisions. As demonstrated
by research by us and others, the benefits
associated with other financial planning services
can be significant and, for many investors,
will exceed the benefits of portfolio-planning
decisions. Therefore, while portfolio decisions are

6 Blanchett, David M. and Paul D. Kaplan. 2017. "The Value of a Gamma-Efficient Portfolio."

56

Morningstar June/July 2017

Benefits of Financial Advice
We introduced gamma to help quantify the value
of intelligent financial planning decisions,
especially the benefits of working with a financial
advisor. Advisors can add value in many ways,
including helping with investment decisions. We
estimate in our analysis that through good
advice, advisors can add value that is equivalent to
a boost in investment returns of about 2.5%
annually for an average investor. However, that
figure will vary significantly by client.

Our estimate is based on a comprehensive
framework of seven questions an investor should
consider during the portfolio construction
process. Completing this process properly
is far more rigorous than simply selecting a few
mutual funds. Of course, any benefit derived from
portfolio-planning advice is offset to some degree
by costs. As long as the advisor provides
comprehensive, high-quality portfolio-planning
services for a reasonable fee, our results show that
the benefits usually outpace the typical costs.
Providing other financial planning services, such as
savings guidance, pension optimization,
insurance planning, and withdrawal planning,
would likely result in even more value for the client.
Furthermore, we think that robo-advisors also
have the potential to complement human advisor
gamma. Taken together, the available benefits
calculated here and in our previous work suggest
there are significant potential benefits associated
with working with a financial advisor. K
David Blanchett, Ph.D., CFA, CFP, is head of retirement
research for Morningstar Investment Research,
a registered investment advisor. Please see disclosures on
Page 6.
Paul D. Kaplan, Ph.D., CFA, is director of research with
Morningstar Canada.
Both are members of the editorial board of
Morningstar magazine.



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