Reducing Wealth Volatility: The Value of Financial Advice as Measured by Zeta

Abstract

F inancial advisers generally assume that their professional expertise and advice adds value to the lives of clients (Hanna and Lindamood 2010). There is, in fact, limited evidence in the literature to support this assertion. The purpose of this paper is to report findings from a study that was undertaken to quantify the value of financial advice. As has been documented frequently and extensively in the academic literature and public media, the sense of economic well-being shared by many Americans was severely challenged beginning in 2007 (Greenspan 2013). The year 2007 marked the beginning of what can best be described as a period of financial stress. Financial stress, as used in this paper, can be defined from a macroeconomic and household perspective. Hakkio and Keeton (2009) described macroeconomic financial stress as the “interruption to the normal functioning of financial markets” (p. 6). Financial stress, when viewed from this lens, exists when policymakers and consumers experience increased uncertainty about (1) the value of assets, (2) the behavior of other investors, (3) information gaps between buyers and sellers of assets, (4) the prudence of holding risky assets, and (5) the usefulness of illiquid assets within portfolios. At the household level, financial stress is generally defined in the context of the reactions exhibited by those in a household after experiencing a financial shock, such as losing employment, receiving late payment notices, being forced to forgo planned expenditures because of lack of income or assets, and losing wealth because of systematic changes in global markets (Garman, Leech, and Grable 1996). Negative reactions such as questioning the real value of assets—such as real estate and equities—and making significant asset allocation shifts from risky illiquid assets to high-quality, low-risk assets are indicative of events triggered by financial stress. Actions taken by policymakers beginning in 2005 to simultaneously promote asset building and restrict open access to the credit markets, coupled with the growing use of financial derivatives created to help deal with information asymmetry, contributed to a series of events that led to what is now commonly called the Great Recession. From a nominal peak in the mid-2000s, American households collectively experienced drops in both income and wealth for Reducing Wealth Volatility: The Value of Financial Advice as Measured by Zeta

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