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Holly Cook: In the world of investing, we often talk about adding alpha or adding beta. But at the recent Morningstar Investment Conference, David Blanchett, Head of Retirement Research for Morningstar Investment Management, introduced the concept of adding Gamma. Here he is to explain a little bit more about what this concept involves.
David Blanchett: Gamma is actually the third letter of the Greek alphabetic. It goes alpha, beta and gamma. I mean, alpha is this thing that you pick at investments, and beta is this idea that you can kind of help a client figure out whether to buy stocks or bonds, and Gamma is kind of everything else. We use Gamma as kind of a placeholder for this concept that you help a client achieve a goal, whether it be saving for retirement, funding education, different things. And Gamma is to kind of help us quantify everything else you can do to help someone get there. So, getting to an outcome is more than just picking good stock funds or good bonds. It’s giving good advice to a client, and Gamma is kind of that concept, okay, what is the value to helping someone achieve that goal.
Cook: So, you are actually measuring how financial advisers manage to make money for their clients?
Blanchett: Exactly. It’s more than just kind of picking great mutual funds, it’s everything else, and so the counterpart in Gamma is that there is value there. And we find in this paper looking at kind of things you can do in retirement, you add about 20% more income for a retiree, and that’s equivalent to about 1.5% or 2% of annual alpha. So as opposed to kind of picking great funds, which you can still do, you can still kind of add value through helping them make better decisions.
Cook: So do you think going forward, we’re quite used to talking about adding alpha and adding beta. Do you think going forward people will start to talk about how much Gamma am I getting here?
Blanchett: I don’t know if they’ll use that term in general, because the idea though of advice is around for a long time. The purpose here is to say, hey, wait a minute, there is value here that we’re not quantifying, and that people should be aware of it.
Cook: Great. Thank you very much for joining me today.
Blanchett: Thank you for having me.
