It serves the few well, but not the many.
Step by Step
This column examines the state of American investment advice. Where is it succeeding? Where are the gaps?
These are the four steps of investing, as I see it:
1. Establishing the initial account
The starting point is to invest. In something. As the Illinois lottery ad copy says, "You can't win if you don't play." Although that is a fib for the lottery, where winning the game consists of refusing to play, it certainly is true of retirement savings.
2. Managing debt
Of course, investing isn't only about assets. The other half of the equation consists of liabilities--keeping debt under control, so that the prospective investor has money with which to buy securities. The worker who trots an ongoing treadmill of acquisition by debt, repayment, acquisition by debt, repayment, is the worker who never gets retirement savings into motion.
This, too, could be labeled the first investment step. The two critical duties for any investor are having some assets to invest and doing so. Both aspects are required to get off the ground.
3. Funding additional accounts
This third step moves the investor up the food chain. The initial account, likely a 401(k) plan, should suffice when combined with Social Security to bankroll an adequate retirement, assuming that the investor made a reasonably high contribution rate. But only adequate. For a retirement that satisfies happier adjectives, such as "secure" or "comfortable," additional investments are required.
Morningstar's David Blanchett invented the term "gamma" to describe some of the benefits that investment advice can bring to retirees, besides the traditional roles of allocating assets (alpha) and selecting securities (beta). Blanchett used the word specifically, but I am hijacking his term to use more generally.
For me, gamma means all value delivered by investment advice, above and beyond the customary tasks, and for investors in all stages of life: tax strategies, withdrawal tactics, exercising stock options, selling a closely held business, making donations and gifts, legacy planning. You name it: If the task is not choosing an asset mix and selecting the securities, and it helps an investor, then it is gamma.