Gamma Defined OR is Your Advisor Worth His Fee? - Rodgers & Associates

Gamma Defined OR is Your Advisor Worth His Fee?

In language, Gamma is the third letter of the Greek alphabet, following our investment favorites, Alpha and Beta.

In mathe­matics, Gamma is a complex function useful in proba­bility and statistics.

In physics, Gamma refers to Gamma rays, or high frequency electro­mag­netic radiation.

And now in the realm of personal finance, Gamma is the value a holistic financial planner brings to the table by increasing your retirement income. Morningstar Inc., a leading provider of independent investment research, released a study last year which quantified the extra income you can earn by making better financial decisions. And these financial decisions have nothing to do with finding the hottest new investment. Instead, the noted decisions are strategic in nature and address ongoing financial planning issues. As stated in the study, “Alpha, Beta, and Now Gamma” by David Blanchett, the five key decisions are:

  1. Total Wealth Asset Allocation, but not just tradi­tional asset allocation based on risk aversion. This decision is also based heavily on risk capacity — your ability to assume risk based on your personal human and financial capital.
  2. Dynamic Withdrawal Strategy, as opposed to a static 4%, only adjusted for inflation. A dynamic withdrawal strategy deter­mines your withdrawal amount annually, with portfolio surviv­ability as a key consid­er­ation.
  3. Annuity Allocation, whether to convert a portion of your retirement assets into a guaranteed income stream to guard against longevity risk, i.e. outliving your assets.
  4. Asset Location and Withdrawal Sourcing, acknowl­edging that you must position assets in the most tax efficient account type and withdraw funds in a way that minimizes taxes.
  5. Liability Driven Investing, or investing with your personal goals and investment horizon in mind, recog­nizing the power of inflation, a known head wind, or “liability” to your investment success.

A holistic financial planner can answer all these questions for you. The Morningstar study (PDF) indicates that getting it right can add 29% to your retirement income or 1.82% on an annual basis. What a boost to your retirement lifestyle!