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Why We Exist

Financial Advisors Bring Value to American Households

The financial and economic value of a Retail Financial Advisor to American households and the American economy at large is enormous to say the least. The threat to American families and the U.S. economy is that the Retail Financial Advisor is predicted to be extinct or nearly extinct by the year 2030. The Financial Advisor Training Institute will locate and train the 250,000 Retail Financial Advisors needed to replenish the industry.

American Households (clients) do not buy life insurance. Life insurance is sold to them by a qualified Retail Financial Advisor. Clients do not buy mutual funds or exchange traded funds. Mutual funds and exchange traded funds are sold to them. Clients do not buy long term care insurance, disability insurance, I.R.A.’s, 529 plans or SIMPLE plans. Those products are sold to them. U.S. assets under management by retail Financial Advisors amount to $145 trillion dollars. [12]

Several research studies have assessed the economic impact of financial advice to American consumers.

  • Morningstar dubs the value of advice as “Gamma” and estimates the value to be 1.59% per year to retirees. 
  • Vanguard calls it “Advisor’s Alpha” and pegs the value of financial advice to be upwards of 3% per year. 
  • Envestnet labels it “Capital Sigma” and also estimates that Financial Advisors add as much as 3% per year of value. [13]

The greatest value that a financial Advisor provides is the behavioral coaching and support to ensure that the recommendations are actually implemented.

A 2013 study by David Blanchett and Paul Kaplan of Morningstar, “Alpha, Beta, and now …Gamma,” found that the benefits of financial advice provided by professional Financial Advisors to retirees improves their outcomes by the equivalent of 1.59% per year increase in returns.

These Financial Advisor-driven outcome improvements were not merely about delivering higher absolute investment returns or generating portfolio alpha, though; instead the advice pertained to areas like “tax alpha” through asset allocation and tax savvy retirement liquidations (from a mixture of brokerage and retirement accounts), designing a more appropriate holistic asset allocation that accounts for all of a household’s assets (including the asset value of Social Security and pensions), effective use of annuities and dynamic withdrawal strategies, and selecting investments in a manner that maximizes the stability and sustainability of inflation adjusted retirement cash flows (as opposed to just picking investments that have the highest expected returns.). Given that these value-adds were all outside of the portfolio itself, the authors dubbed the Financial Advisor’s contributions as :Gamma” to distinguish it from the more traditional investment/portfolio metrics like alpha and beta.

A similar 2014 study from Vanguard researchers Francis Kinniry, Colleen Jaconetti, Michael DiJoseph, and Yan Zilbering—“Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha”—went a step further. It estimated that the economic benefits of a Financial Advisor’s advice to be as much as 3% per year. This included value-ads in areas from cost-effective investment selection and rebalancing, to asset allocation, behavioral coaching (to avoid poorly timed portfolio changes), and the (tax-sensitive) withdrawal order of liquidation strategies. Again, the authors excluded any direct portfolio-related return enhancements, like superior asset allocation or improved diversification, which ostensibly could just add further “portfolio alpha” on top of the “advisor alpha” (but aren’t necessary to justify the advisor’s cost).

More recently, the Envestnet Quantitative Research Group tackled the topic in a whitepaper entitled “Capital Sigma: The Advisor Advantage.” Similar to Vanguard, it suggested that Financial Advisors add value in a wide range of areas, from general financial planning strategies to systematic rebalancing to portfolio tax management through tax loss harvesting to more effective asset allocation and diversification and choosing lower cost investments. These researchers estimated these various advisor contributions cumulatively added up to as much as 3% per year of enhanced returns, which they dubbed “Capital Sigma” (the Greek symbol for summing up the parts).

The State of the Industry

  • Advisor Shortfall by 2020

    220,000

  • Financial Advisors Age 35 or younger

    22%

  • Managed by Financial Advisors at risk (Trillions)

    $145

  • GDP at risk (Billions)

    $81

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