How to Calculate An Advisor’s Value: Risk Management and Estate Planning

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How to Calculate An Advisor's Value: Risk Management and Estate PlanningAllan S. Roth wrote an article for Financial Planning magazine entitled “Calculating An Advisor’s Value.” The article claimed that five different components of intelligent planning decisions comprised the value brought by a smart financial advisor. According to Morningstar, planners can add the equivalent of 1.82% annual return to clients through these five components of what they call “gamma.”

I commented on the introduction and indexed of all five components (plus two additional items) in a previous blog post. In this post I am just going to comment on the two additional items, “Risk Management” and “Estate Planning”. Here is they describe the two additional items:


In a presentation at the Morningstar Investment Conference in June, Blanchett, the gamma researcher, noted that there were other sources of gamma. (Asked precisely how many, he quipped that there were at least 119 different areas.)

Among the most important ones:

* Risk management: Advisors can help clients with risk management by assessing their insurance needs and helping clients buy the right coverage at the right price. If the clients can sustain a loss without having it affect their lifestyle, self-insurance is typically the most cost-effective – say, having a higher deductible on a policy, or dropping collision coverage on a 10-year-old car. But for other clients, comparing insurance policies is anything but simple – and it is certainly one way financial planners can bring value to the table.

* Estate planning: Helping clients pass on money in the most efficient way is an essential value that planners add. Should clients gift money to their children now? Should they consider creating a 529 plan for their grandchildren? You can also help a client find the right estate planning attorney, and then work with that attorney to create a portfolio that is most efficient from an estate-tax perspective.

There are other pieces of advice advisors can offer to add gamma for clients: Should they pay off their mortgage or even get a reverse mortgage as a source for cash? Should they take a lump-sum defined benefit payout, or an annuity with or without a survivorship option? Can they truly afford the vacation home they’ve always wanted?

Blanchett admits that the five areas are all interrelated. For example, the safe withdrawal rate is impacted by the asset allocation and tax efficiency decisions. And gifting money to children may be wise, but could reduce the amount your client has to live on safely.

Blanchett doesn’t necessarily suggest that advisors focus on the exact value of the gamma they offer. Yet whatever the figure, and whatever the term, the framework gives advisors a way to discuss the services they provide to clients.

That work can increase the cash that clients have to live on dramatically. Since money is essentially stored energy – allowing clients the freedom to do whatever they want with their lives – creating at least 29% more of this energy for clients is delivering great value.

Risk Management is a complex field from health insurance to life insurance. Perhaps one of the least expensive and most commonly overlooked insurance is umbrella insurance. On the CFP exam umbrella insurance is always the right answer. Reverse mortgages are nearly always a bad idea.

Estate planning is another large area of comprehensive wealth management. The most important product of estate planning isn’t avoiding probate or reducing estate tax exposure, it’s achieving family harmony.

Comprehensive wealth management is a bottomless task. Perhaps the greatest benefit of working with an advisor is the peace of mind of knowing someone else is helping you with the task.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.