There have been numerous studies examining the difference in outcomes for clients working with comprehensive financial planners and those working with transactional salespeople. TFA firmly believes the planning we provide clients is the greatest value-add, although it is sometimes difficult to quantify. Fortunately, studies by well-respected firms do attempt to quantify the value added by comprehensive planning.

Morningstar study, published in 2013, aimed to quantify the potential value provided by better financial decision-making – what the study calls gamma* and what Vanguard (see below) calls advisor alpha – within the context of retirement income planning.  According to the Morningstar study, a good advisor can add the equivalent of a 1.82 percent annual arithmetic return to clients through five specific components (listed below in decreasing order of impact).

  • Dynamic withdrawal spending;
  • Tax efficiency via asset location and withdrawal sourcing;
  • Total wealth asset allocation (which includes human capital and Social Security planning);
  • Adding guaranteed income efficiently; and
  • Asset allocation based upon future spending needs and liability-matching.

Not surprisingly, the study found that making smarter financial decisions leads to better outcomes. More specifically, better planning allows for an increase in retirement income of 29 percent. Moreover (and significantly), one of the authors readily acknowledges there are additional sources of value, including estate planning, risk management and other forms of financial planning.

Vanguard has been looking at this subject since at least 2001. In summary, Vanguard defined “advisor alpha” as being built upon “the best practices of wealth management” and as having a potential value of roughly four percent per annum (before fees, which are presumed to be about one percent annually).

Vanguard separates these best practices into three general categories.

  • Portfolio construction;
  • Behavioral coaching; and
  • Wealth management

Those who are familiar with TFA know we are happy to discuss individual stocks with clients. We understand some clients enjoy discussing individual stocks and bouncing ideas off their advisor. Nonetheless, based on the performance of most active managers over the past years, we believe picking stocks or concentrated investment funds most often detracts from performance, while earning a nice commission for the advisor.

Investors should expect better performance than passive indexes over the long-term. Our use of Dimensional Funds in client portfolios offers clients low-cost access to well-diversified portfolios with the goal of out-performing passive investments by employing factors based on academic research. Our fundamental belief is a disciplined investment process, combined with comprehensive financial planning, meets a great need and provides a real service.