Delivering ‘Wealth Planning Alpha’

A holistic approach can help advisors demonstrate the tangible and intangible value of services to clients and prospects.

By Mallon FitzPatrick
Mallon FitzPatrick

Alpha is a term typically reserved for investing, and it’s used to describe a strategy’s ability to beat market indices. It may be referred to as “excess return” relative to a benchmark. One must also consider the beta, which refers to how much additional risk, if any, was needed to achieve investment alpha.

Alpha and beta are a relatively straightforward way to explain the risk-adjusted alpha that an investment strategy or manager adds. Performance above or below that benchmark, typically blended at the portfolio level, is attributable to the advisor’s manager or fund selections. The so-called “value add” of the advice — or alpha — can be quantified.

What’s not quite as clearcut and harder to communicate to clients is the value an advisor may be adding to a client’s financial circumstances beyond selecting an alpha-generating investment strategy. According to recent studies shared by the Absolute Engagement & Investments & Wealth Institute, more than 80% of clients are generally satisfied with their financial advisors. While we cannot be sure that all of their advisors are delivering value, the data shows that, at the very least, clients believe they are.

This begs the question: How do we quantify the non-investment value we as advisors deliver to the client?

A good starting point is within the wealth-planning process, as it encompasses a broad range of disciplines: client’s behavior and biases, taxes, estate, insurance, investments, and a myriad of situational planning such as retirement, divorce, education, business and succession, wealth transfer, liquidity events, and more.

To understand whether the process and services we provide under the wealth planning umbrella will add value, we need a benchmark. Let’s assume that the client’s projected path, without implementing our recommendations, is the benchmark. Any improvement we make to the benchmark, which can be measured in several ways, is added value.

The value we add to the client’s projected path is analogous to excess performance due to manager selection within a portfolio allocation, or alpha. Some immediate benefits can be quantified within wealth planning, but often it is a projection of our recommendations over a sustained period. The services we provide beyond investing and the projected improvements to the client’s current path are what we call Wealth Planning Alpha.

Quantifying Wealth Planning Alpha

For sophisticated wealth-planning recommendations, there are clear quantitative measures of potential alpha. Our recommendations often straddle multiple planning disciplines that have interdependencies. For instance, a Roth conversion can straddle income-tax, estate-tax and legacy planning, as well as client behavior/biases if the recommendation is to pass a tax-advantaged asset to heirs.

At a high level, the alpha may be improving the Monte Carlo probability of success in achieving the plan’s objectives. Increasing the probability of success reduces the risk of meeting the client’s objectives — that’s measurable added value.

Other sophisticated planning recommendations may be quantified: increased wealth transfer to heirs or charity, the estimated reduction in estate taxes, adequate means to safely fund retirement, the after-tax value of a liquidity event, proposed separated spouses’ settlement versus the advisor recommendation, or an improved Monte Carlo probability after investing in a less volatile asset allocation.

For more focused recommendations, the measure could be the amount saved in taxes or insurance premiums, the tax benefits of asset location, and a decrease in clients’ exposure to creditors through increased liability protection.

Alpha caveat

The added benefit of our recommendations to the benchmark’s projected path may be modeled and shown visually through planning tools. However, it can only be considered alpha if the client agrees to our recommendations and acts. We can create the best technical solution, but it doesn’t matter much if the client is averse to the recommendation for whatever reason. Client behavior and biases are factors we must work with, and our strategies must align with these preferences to increase the likelihood of a client feeling motivated enough to execute.

Keeping clients invested in turbulent times is a veritable value we add that can be quantified. During tumultuous times, it’s beneficial to keep clients focused on the long term. One effective tactic is to review a visualization of the client’s situation today, model significant negative portfolio performance in the first couple of years, and demonstrate how the plan fairs throughout their lifetime using conservative assumptions.

Can peace of mind be quantified?

Stress or anxiety in clients’ minds can be relieved by assuring them their financial circumstances are resilient in most variations of adverse market, economic, tax and regulatory environments.

Showing the client empirically how likely and unlikely factors impact the success of their plan will help instill peace of mind. You may find that their plan is not resilient, and we can recommend a margin of safety by setting aside liquidity, an improved risk/return asset allocation, or contingency plans if certain scenarios come to fruition. This includes generating more income; leveraging; or, that most dreaded of adjustments — reduced spending.

There’s a powerful assurance that comes with telling clients that under most circumstances that have historically occurred, or that we believe may occur, they’re going to be fine — and that we have a plan should “this or that” happen. That margin of safety is quantifiable and will contribute to the client’s peace of mind.

There are also less quantifiable aspects of peace of mind, such as the value of knowing your advisor is there for you. For some investors lacking the time, willingness, or ability to confidently handle their financial matters, working with an advisor may bring peace of mind. This value may come through informal avenues such as supporting a client through an emotionally taxing divorce or the loss of a family member. This is almost impossible to quantify, as each client values their support systems differently.

Although we cannot attach a precise number to the value of peace of mind, we can point to recommendations that likely reduce anxiety and stress. Calming frayed nerves helps clients achieve peace of mind; if advisors can find a portfolio allocation that is less volatile than the client’s current portfolio composition and is projected to achieve their long-term objectives, they will likely reduce the client’s stress during turbulent markets and contribute positively to their overall well-being. It’s the job of advisors to ensure clients feel calm and confident with the management of their wealth.

Communicating value to prospects

As advisors, wealth managers and wealth planners, it’s extremely difficult to differentiate ourselves in a crowded marketplace where competitors promise similar services. As mentioned previously, 80% of clients are satisfied with their advisor for reasons they may or may not be able to fully articulate.

Many clients lack a standardized way to compare the services they are receiving against those provided by other advisors. Clients might be reasonably satisfied and feel secure, but the advisor may not be taking full advantage of planning opportunities or seeking to consistently add Wealth Planning Alpha. Clients often leave their advisor only once a mistake has been made or when a generational wealth transfer occurs.

This begs another question: How can you communicate value to your prospect beyond investment performance?

The first step may be understanding your Wealth Planning Alpha. Evaluate your planning process and quantify the improvements you are making to your clients’ current courses of action. Value may be communicated in terms of measures such as the average increased probability of success, wealth transfer efficiency, performance achieved by keeping clients investing, and taxes saved. The likelihood of conversion may be improved by the prospect understanding the tangible benefits of your services through stories that are backed by data.

Additional Reading: Tax Deferred Strategies for Turbulent Markets 

There are impactful measures to demonstrate tangible value beyond investment performance through Wealth Planning Alpha. Peace of mind is not as nebulous a concept as one might think, considering the activities we perform to help clients achieve this desired state.

While communicating value to prospects is difficult, the likelihood of conversion may be improved by helping potential clients understand the tangible benefits of your services through data-backed stories and personalized wealth planning visuals. There’s no silver bullet when it comes to converting prospects, but careful consideration and deliberate communication about the measurable Wealth Planning Alpha that you can provide goes a long way.

Mallon FitzPatrick, CFP, is a principal, managing director, and head of Wealth Planning at Robertson Stephens, a wealth management firm providing innovative and comprehensive wealth planning and investment solutions through an intelligent digital platform.




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