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Monday, October 26, 2015

Nevermind Alpha and Beta: Help FAs Deliver Gamma

News summary by MFWire's editors

Alpha is tough to consistently achieve, and beta is a commodity, but there is another value that FAs can deliver: gamma. For fundsters whose products much more directly deliver alpha and beta, perhaps it's time to help advisor deliver something else.

John Rekenthaler
Morningstar, Inc.
Vice President, Research
In his latest column, Morningstar guru John Rekenthaler argues convincingly that the state of financial advice has improved dramatically in recent decades. More choice, greater transparency, and lower fees go a long way towards explaining that improvement. But that's not the whole story.

Rekenthaler highlights the concept of "gamma", offered up by his colleagues David Blanchett and Paul Kaplan, and uses it as a catch-all category for things that improve investor outcomes while not involving asset allocation or securities selection, i.e. alpha and beta. Rekenthaler makes the case for gamma being a key driver of the improvement in financial advice:

The beauty of gamma is that it is achievable. It's hard for financial advisors to deliver new betas to their clients, or to find alpha. But cutting tax bills, incorporating better withdrawal strategies, improving savings behavior, developing a strategic rather than tactical mindset ... these are things an advisor can do, and well.
As Rekenthaler notes, this logic helps explain the power of automatic features (auto-enrollment, auto-escalation, and target date funds and managed accounts) in 401(k) plans. And it also fits into the growing narrative about combining roboadvice with human advisors.

For fundsters trying to support FAs, the importance of gamma may lead to new value added tools and programs that position their advisor allies to reinforce good client behavior, optimize taxes, and the like. "Goals-based wealth management" is a concept you may want to get to know better. 

Edited by: Neil Anderson, Managing Editor

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