Alpha: there's more to it than the markets

Lize Visser

What is alpha?

Alpha is the measurement of performance over and above the benchmark index (the expected return from the market). When you hear someone considering the alpha of a unit trust for example, they are comparing the performance (in essence, the return) with a certain benchmark like the All Share Index (ALSi) or the average return of all major unit trusts in the market with a similar risk profile.

But when we look at alpha, we need to look beyond pure market performance. Your adviser can help you achieve better performance - and ultimately contribute to increased alpha, by guiding you through a tailored and well considered advisory process.

Importantly, alpha considers the return of a certain investment in the context of its risk level. For instance, alpha considers the volatility of a unit trust, and compares its performance to a benchmark index with the same volatility. The excess return of the unit trust relative to the benchmark is its alpha. This results primarily from successful investment management but it is also achieved through quality advice.

The value of advice is changing

The financial advice industry continues to gravitate towards fee-based advice, which means there is increasing pressure to define the value of advice. For investors without the time, willingness or ability to handle their own financial matters, an adviser may simply offer some peace of mind. But advisers can offer far more value.

Having a personalised financial plan promotes complete disclosure on your portfolios. More importantly, it enables you to share what is of most concern: your goals, feelings about risk, family matters and charitable interests. Sharing this information is crucial to building trust and deepening the advisory relationship. It also helps to identify opportunities to generate alpha by adding additional value.

Advisers go through regular product accreditation with financial services companies. They have access to a wide spread of information to determine the most suitable products and funds for their clients' needs and objectives. They also know what features and benefits to look for in specific products, and where to find these products at competitive prices. Ill-advised clients often get trapped in products with fixed term commitments and costly exit penalties.

Navigating the complexity of investing

Although advisers choose investment strategies for their clients, they cannot control performance. However, performance remains important to investors. Even in an established advisory relationship, periods of significant underperformance can undermine trust.

Advisers know how important it is to stay the course during a bear market, or to rebalance when markets are overvalued - even when it doesn't feel like the right thing to do. Countless studies have revealed the positive impact of this on clients' wealth creation.

Investors who are too confident in their ability to predict investment outcomes are often under-diversified and more susceptible to volatility. They may end up taking more risks, and trading too often.

Adviser alpha can make a significant difference

Advisers add real value by structuring your investment plan and actively managing your portfolio to achieve your objectives. All you have to do is realise this value.