Morningstar GAMMA – Supports Advisors and the Planning Process

This month, Morningstar’s research group introduced the concept of GAMMA to investors.  Now options nerds or recent CFA students will have another definition for Gamma, but let’s forget that one for the moment.

To Morningstar, Gamma is the incremental value/return generated  by an investor for making ‘more intelligent financial planning decisions.’

They outline that by improving the financial planning decisions retirees could see their retirement income increase by 29% or in other words, their total return by 1.82%.

We feel strongly in the use of financial advisors.  Advisors help with the beta decision (ie. volatility/asset allocation,) the alpha decision (which stocks/bonds/funds to buy) and now their help in the planning of your affairs is also being quantified.

Here’s the full Morningstar report.

I thought I would highlight some of the key findings from Morningstar.  They focused on 5 key areas – optimal asset allocation, withdrawal strategies for retirees, using guaranteed income products (annuities,) tax considerations and also understanding liabilities to optimize portfolio allocations.

Some observations:

  • Risk decisions are based on risk preference and rarely take into account an investors risk capacity.  Asset allocation decisions should be impa
  • Withdrawal rates should not be static, but should be adjusted over time, impacted by returns, survivability (I guess of the portfolio and the person.)
  • Use of annuities are important, clients fear outliving their money (61%) more than death itself!
  • Tax strategies include placing higher taxed investments in deferred planned (401k or RSPs) and growth vehicles like stocks in taxable accounts.  The sequencing of which to redeem first is also important.
  • Asset allocation needs to be more liability driven, ie. more focus on funding risks like inflation and currency.

I think investors due to the constant barrage on wealth managers and investment fees, many clients are so focused on price, that they are ignoring value.

Value creation exists in the investment business, as previously addressed in wealth managers keeping client emotions in check, and more tangibly by setting a tailored investment plan and making the sound alpha decisions.

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