Good gamma: Managing investor expectations

What else can be done to maximize returns and add to the retirement nest egg and income stream?

If one is candid with one’s clients, then managing expectations is a vital part of one’s job — especially in challenging and uncertain economic times such as these.

Such a conservative approach flies in the face of current talking head chatter on the financial channels, where high returns seem as plentiful as good weather in Hawaii. But there is a difference between talking about hypotheticals and actually dealing with the nuts and bolts of retirement investment reality.

When we advise our clients that lower returns are possible, we consider a number of factors. The risk for some factors is glaringly apparent. For example, we continue to wonder whether central bank economic policies – to prop up their economies with monetary policy – will prove merely a Potemkin illusion of stability. The near-zero return on government bonds and cash and the recent phenomenon of insurance companies seeking to buy out current insurance contracts suggests that even the big money recognizes that lower returns are on the horizon. We also believe that a balanced portfolio will lead to lower returns in the current economic climate.

What else can be done to maximize returns and add to the retirement nest egg and income stream?

Saving more is always the easiest and smartest option, yet few seem willing or are not able to do so. Another strategy is to increase awareness about tax efficiency and asset location, not just allocation.

We expect that our clients would tell you that we beat this drum with numbing regularity as we continually see the same scenario play out: people who do not create diversified tax efficiencies, and rely too much on tax-deferred investments in their long-term plans, are at risk. They may find themselves facing far greater tax burdens than they expected or needed to pay in later years. After all, it is not what you make, but what you keep after taxes and expenses that matter.

Recent Morningstar and Vanguard studies on the value of advice suggests that gamma, defined as the value of advice in achieving client objectives including retirement income, could be worth up to 300 to 430 basis points (3 to 4.3 percent) to the typical investor.

Additionally, for the past three to five years, we have taken a critical look at asset management expenses. We know this isn’t the most exciting of initiatives – though it does get some traction in the 401(k) world – but as fiduciaries, we work hard to keep internal costs very low. The math is simple: every dollar saved on asset management fees, coupled with good gamma, adds to an investor’s total return.

A recent Morningstar study revealed some intriguing facts about mutual fund expenses. In the broad U.S. equity group, funds with expense ratios in the lowest quintile had a 55.98 percent success rate from 2008 to 2013. The study determined the next-cheapest tier of funds had a success rate of 45.69 percent while funds with average expenses had a 38.84 percent success rate. And here is an eye-opening finding: The most-expensive quintile of funds had a success rate of just 23.57 percent.

In other words, the higher the fees, the less likely funds were to survive and outperform. The results were across-the-board similar in the sector-equity, international-equity, taxable-bond and municipal-bond groups.

Most investors, and especially retail investors, don’t realize they have a voice about controlling fees. Investors and their advisors must be informed on differing fee structures and seek the best combination of gamma and expense.

Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000 or

Categories: Finance