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Media Backgrounder: The Gamma Factor and the Value of Advice

November 7, 2016

Toronto, ON - November 7, 2016 - This backgrounder highlights key findings from new landmark research ( from Dr. Claude Montmarquette and Ms. Nathalie Viennot-Briot (Centre for Interuniversity Research and Analysis of Organizations – CIRANO) on the gamma factor and the value of advice.

The researchers used sophisticated econometric modeling to factor out a host of variables in order to isolate the impact that financial advisors have on client wealth. They succeeded in attaching a hard value to the increase in net worth that the average advised investor enjoys over investors with similar traits who do not receive advice.

The purpose of this backgrounder is to provide information to journalists and others about the benefits of advice, as context for editorial analysis of regulatory and public policy proposals. The findings of the authors’ 2016 study and their earlier paper summarizing similar research in 2012 provide significant insights for regulators as to the potential consequences on investor savings of policies that would limit access to advice. The two studies underscore the importance of preserving access to advice for Canadian investors.

Key Findings

The 2016 study found significantly higher wealth accumulation associated with advice than in 2012. After adjusting for nearly 50 socio-economic and attitudinal differences, households with an advisor for 15 years or more accumulated 290% more assets in the 2016 study versus 173% in the 2012 study. The authors attribute these differences in part to a refinement in their analytical technique and better financial markets during the second study period.

In addition, the new CIRANO research examined the accumulation of wealth for individuals who dropped their advisor between 2010 and 2014 versus those who had an advisor in both years. The analysis showed that households who dropped their advisors lost a significant percentage of their asset values, while households who kept their advisors saw their asset values grow.

CIRANO finds that the discipline imposed by a financial advisor on households’ financial behaviour and increased savings of advised households are key to improving asset values relative to comparable households without an advisor.

The Impact of Gamma

Until now, academic literature and public and regulatory debates on matters relating to the value of advice have been focused on the ability of advisors to generate alpha for their clients. The CIRANO authors are able to demonstrate that the focus on alpha in these discussions has been misplaced. They show that the gamma factor – the discipline associated with longstanding financial advice and higher savings rates – is key to explaining the large observed differentials in asset values accumulated by advised over non-advised investors.

Selection of Participants

A key feature of this study is that the authors were able to restrict their analysis to those advised households who have chosen a financial advisor, and to eliminate the segment of advised households who were first directly approached by one. This removes the criticism levelled at their earlier work that households with advice are wealthier because these are the households that advisors target.

Research Methodology

CIRANO’s 2016 study is based on data from an Ipsos-Reid survey conducted in 2014.

CIRANO’s earlier study was completed in 2012 and based on 2009 Ipsos Reid survey data. It was peer-reviewed and published in the journal Annals of Economics and Finance in 2015.
Key aspects of the methodology:
•High-quality sample size of 1,584 households – 487 with advisors and 1,097 without – developed through a series of steps from an initial pool of 18,333 online survey participants.
•A mathematical regression model was applied to measure the relative impact of a wide range of variables – 50 in all – such as income level, age, investment preferences, and the use or absence of a financial advisor.
•The 2014 Ipsos Reid survey included additional survey questions that allowed the CIRANO researchers to focus only on those households that found their own financial advisor – thus removing the potential bias of earlier work (of advice following wealth rather than wealth resulting from advice).
•An interesting feature of the 2014 Ipsos Reid survey was the opportunity it provided to match households that were also present in the 2010 study. This matching gives a sample of 282 observations that enabled the CIRANO authors to study the evolution of these households’ financial situations for four years: 2009 to 2013.
Biography of the Lead Researcher

Dr. Claude Montmarquette is a Fellow of the Centre for Interuniversity Research and Analysis of Organizations (CIRANO) and Professor Emeritus of Economics from the University of Montreal. He has authored or edited eight books, more than 70 scientific articles, and more than 55 public policy papers. Dr. Montmarquette has chaired and participated on many committees for the Government of Quebec and for many others, both nationally and internationally. He is a member of the Order of Canada.

For information:

Sara Clodman, Senior Manager, Public Affairs, IFIC 416-309-2317

For more information contact:
Sara Clodman
Senior Manager, Public Affairs
The Investment Funds Institute of Canada (IFIC)
Phone: 416-309-2317

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The Investment Funds Institute of Canada (IFIC)


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