How to Calculate An Advisor’s Value: Liability-Relative Optimizing

Allan S. Roth wrote an article for Financial Planning magazine entitled “Calculating An Advisor’s Value.” The article claimed that five different components of intelligent planning decisions comprised the value brought by a smart financial advisor. According to Morningstar, planners can add the equivalent of 1.82% annual return to clients through these five components of what they call “gamma.”

I commented on the introduction and indexed of all five components (plus two additional items) in a previous blog post. In this post I am just going to comment on the fifth of the five, “Liability-Relative Optimizing”, to which Morningstar suggests that advisors bring an additional 0.14% to their clients. Here is they describe the component:


This technique takes the asset allocation decision one step further by looking at clients’ specific liabilities – namely, future cash needs.

At its most basic, it requires advisors to account for the potential for higher inflation or other shifts to real-world purchasing power. But it also maps a client’s expected financial needs – a child’s college funding, which would be tied to a specific time frame, for instance, or the need to develop real cash flow in retirement – against the assets needed to cover them. In retirement, for instance, traditional modern portfolio theory might come up with a portfolio with little to no TIPS, while a liability-relative strategy might use TIPS as the highest-weighted asset class to minimize exposure from potential inflation.

Obviously a smart advisor with a good relationship with their clients together anticipate upcoming expenses and withdrawals and adjusts their asset allocation and cash flows to make sure that these needs are covered. This is really just a specific case of dynamic withdrawals covered previously.

Certainly, college 529 plans offer some specific opportunities for savings. In Virginia, contributions to Virginia’s college savings account qualify for a Virginia state tax deduction up to $4,000 an account per year (the excess is carried forward). At Virginia’s top rate of 5.75% this is an immediate savings of $230 per year. Additionally, all interest, dividends and capital appreciation are tax free so long as withdrawals are used for qualified educational expenses. If growth is as 11% per year, and the account holder is paying a minimum capital gains tax of 15% this should result in an annual savings of 1.65%.

Obviously an investor has only a limited amount of their net work in college 529 plans. We currently have about 160 accounts worth $6.1 million for average account size of $38,574. Interestingly enough, grandparents represent most of the account owners. We regularly review college 529 plans with our clients as a form of life planning and estate planning.

Another special type of account is a Heatlh Savings Account (HSA) which allow you to make pretax contributions and then not pay any tax on withdrawals so long as they are used to pay for qualified health expenses. Any money which flows through an HSA completely avoids taxation at ordinary income tax rates.

To build real wealth, you need specific wealth management tools. One of these is opening the right accounts and using them correctly. Most families have less than half of the accounts they really need, and young newlyweds often only have a checking account. We’ve written an article on the many different multiple accounts which help in comprehensive wealth management. Tax favored accounts can bring real value as it is the small changes over long periods of time which comprise much of the value of comprehensive wealth management.

Here is an index to the entire “How to Calculate An Advisor’s Value” series.

About the author

David John Marotta, CFP®, AIF®

David John Marotta, CFP®, AIF®, is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at and blogging at

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