Retirement research expert at Morningstar argues advisors can add value beyond benchmark-beating returns
While financial advisors may focus on the alpha they deliver to client portfolios as a measure of their value, that’s by no means the only way to evaluate their success at supporting people’s retirement goals.
That was the point made by David Blanchett, head of retirement research for Morningstar’s Investment Management Group, in a recent commentary.
In a think piece published by ThinkAdvisor, Blanchett noted how most advisors’ value propositions hinge on investment alpha, which consists of portfolio management actions that can lead to investment outperformance.
“The thing about investment alpha, though, is that it’s pretty much a zero-sum game,” he said. “For every winner out there, there has to be a loser, and that’s before considering fees.”
The way out of this trap, Blanchett suggested, is to consider a wider definition of alpha. For example, advisors can add tax alpha through strategies that boost clients’ after-tax rate of return or after-tax wealth. Another example is longevity alpha, which deals with how clients can achieve sustainable income throughout their retirement.
“Because longevity alpha is focused on accomplishing a goal, it can include other types of alpha,” he said, noting that tax alpha and investment alpha can be thought of as smaller tributaries that feed into retirees’ stream of income.
Another type of longevity alpha, Blanchett said, involves possibly delaying claiming social security retirement benefits. Annuities, he suggested, should also be included under that general umbrella.
“You cannot guarantee a certain level of lifetime income from a portfolio [of investments], but you can with an annuity,” Blanchett said. “Annuities provide coverage against one of the hardest risks to plan for: longevity risk.”
Advisors should also resist the temptation to buy into a false dichotomy between investments or annuities, he added. Rather, they should realize that the most efficient strategies are likely to be a blend of both approaches.
“[B]y explicitly combining the idea of longevity protection and investment alpha into a single term, hopefully some advisors will realize that the goal of the optimal retirement income strategy can’t be ‘solved’ through efficient portfolios (i.e., investments) alone,” he said.
