In our related post on the beauty of proper asset location, we mentioned an advisor can help you benefit from this often-overlooked strategy. So what’s it worth and can it be quantified? Reprinted with permission, “Nerd’s Eye View” columnist Michael Kitces’s analysis found it can add up to 0.75% of economic impact to your bottom line. That’s a lot of economic oomph.
Quantifying the Value of Financial Planning Advice
by Michael Kitces
Infographic © www.kitces.com
Having embraced evidence-based investing as one way we help our clients enjoy simplicity and transparency in their financial lives, we are careful to the point of obsession when considering fund manager alliances. We want to collaborate with firms who share our “client-first” business strategy, and are as thoughtful as we are about investing.
That’s why I recently attended a two-day AQR Capital Management Investment Symposium in San Francisco. I wanted to hear more about the traditional and alternative strategies AQR is working on to help investors capture market returns, manage market risks and minimize the costs involved. Insightful commentary about the way they think (like this piece here) is just one of the reasons the firm has experienced explosive growth over the last eight years.
Here are some of the event’s key takeaways that appealed to me:
- The firm takes a systematic approach to its investment strategies, to avoid the emotional bias that creeps in when “human interaction” is involved.
- They’re big on peer-reviewed research – others and their own.
- They look at lots of new strategies or how to improve on existing ones, but they only bring a handful of what they consider to be their best ideas to market.
- While many of AQR’s strategies are hedged, they are a rare breed as low-fee champions, decrying the traditional (excessive) “2 and 20” hedge fund fee structure. “We won’t do anything that will not provide – or leave – the investor with a reasonable return,” said managing and founding principal Cliff Asness. (That sounds smart to me.)
- They’re also big on diversification as an important way to improve on investor outcomes. “We look at everything,” said Asness. “If it’s uncorrelated, it’s additive.”
- Like us, they emphasize financial literacy and investor education as key. As AQR’s managing director Pete Hecht said, “We all should hold our managers accountable for what they claim to offer. … It’s our job to be helpful and to educate.”
Well said, and I’m glad I invested the two days. While AQR’s solutions may not fit well with every investor’s portfolio, personal circumstances and long-range plans, it was refreshing to hear what they had to say.
I recently read a study by Wei Dai, a PhD with Dimensional Fund Advisors. The study discussed how diversification (read: the number of securities within a portfolio) impacts the reliability of returns. The key takeaway from her paper was this – broad diversification, combined with long-term investing (5-10 years) can improve the reliability of investment outcomes.
A strategy that is not well diversified may exclude from its holdings the companies that ultimately generate investment premiums. In other words, the odds are stacked against portfolios with fewer names. Wei shows that a well diversified strategy would have at least 200 names while over 75% of U.S. based mutual funds have less than that number. The strategies we employ seek to capture identifiable alpha through broad diversification with well-over 10,000 securities in only a handful of individual funds.
If you are interested in a copy of the paper from Dimensional Fund Advisors, please click here to reach out to a member of our team.