Gamma in Action
Financially sound households get advice from financial planners.
In 2013, Morningstar researcher Paul Kaplan and I introduced a concept we called gamma. Gamma attempts to quantify the potential value of financial planning. As U.S. households increasingly become responsible for more financial decisions, such as determining how much to save for retirement, how to invest those savings, and when to retire, and yet typically lack financial acumen, financial advisors are well-positioned to help improve household financial decision-making. Indeed, a growing body of theoretical research, including our gamma research, has noted the potential value of advisors in a variety of financial domains; however, empirical evidence on the topic is mixed and generally suggests households that use financial advisors do no better (or even worse) than those who don’t, especially when it comes to investment-related domains.
These findings may be explained in a variety of ways. One explanation could be that the empirical research, which is largely investment-focused, has not captured value created in other domains such as improved savings rates or life insurance coverage. Another reason could be that certain types of advisors, such as financial planners, provide valuable services that are not consistently captured in a relatively broad financial advisor description.