In its search for ways advisors can help clients improve retirement outcomes, in a report released Wednesday, Morningstar put a number to how much more income a person can generate by being a better investor: 29%. Referring to this extra income as “gamma,” Morningstar noted that this increase is equivalent to 1.82% bump in annual returns.
“Investors arguably put a lot of time and effort into selecting investment funds or managers they hope will outperform the market—the so called ‘Alpha’ decision,” David Blanchett, head of retirement research for the Morningstar Investment Management division, said in a statement.
The report, “Alpha, Beta and Now … Gamma,” focused on five factors that affect the success of a retirement plan: optimal total wealth asset allocation, dynamic withdrawal strategy, guaranteed income products, tax-efficient allocation decisions and portfolio optimization.
The report determined investors could earn an extra 29% on their portfolios through gamma-efficient investing by running a series of tests that analyzed the effects of total wealth asset allocation, annuity allocation and dynamic withdrawal strategy; liability-relative optimization; and tax efficiency of assets.
“The increase in utility-adjusted income (i.e., Gamma) could be multiplicative, additive or neither and is something we leave for future research,” the report noted. “Here, for simplicity purposes, we assume the improved income that could be generated are additive across the three tests since each of the tests are relatively independent.”