3433-vol. 6 issue 2-3.pmd - iarfc

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24 Journal of Personal Finance 3 DIMENSIONAL ALPHA: VALUE ADDED Monroe M. Diefendorf, Jr., MI, CLU, ChFC, CFP ® , RFC ® , CIMA ® , C3DWP ® Jeremy P. Donovan Wealth management is more than money management. Financial, personal, and social wealth comprise one’s total wealth. If each dimension of our wealth has a value, then preserving and protecting each becomes an important part of the total wealth-management process. Financial-wealth rating (φ). A measure of how the advisor enhances the client’s returns relative to risk vs. reward. Personal-wealth rating (π). A measure of the permanent preservation of a client’s wisdom, beliefs, and values for future generations (legacy) as provided through specific strategies created by the advisor. Social-wealth rating (σ). A measure of how the advisor amplifies gifting through charitable planning strategies (philanthropy). When an advisor can add value and synchronize all three of these dimensions, the advisor’s value is not simply geometrically increased, it is exponentially amplified. This holistic advisor significantly reduces the prospect for being replaced as a result of his or her investment performance results. But how does a client determine if an advisor can provide totalwealth management solutions? The authors have created a formula, the 3- dimensional alpha (3Dα), that can be used to determine if an advisor can provide more than simple money management services. In creating 3Dα, the authors assumed the following properties to be measurable: • The client’s self-assessed degree of desire for a trait or skill used in providing 3D wealth-management services (3D wealthclient demand score) • The advisor’s use of proven strategies and constructs designed to provide 3D wealth-management services (3D wealthpractitioner rating) 1 Reprinted with permission from: Diefendorf, JR, Monroe M., Donovan, Jeremy P. (2007, November/December). 3-Dimensional Alpha: Value Added. The Monitor, 41- 43. ©2008, IARFC All rights of reproduction in any form reserved.
Volume 6, Issue 2 & 3 25 These values will be measured using the 3D Wealth Client Demand Survey and the 3D Wealth Practitioner Survey. The Survey Says... The 3D Wealth Client Demand Survey 1 is conducted electronically and consists of 30 comparative multiple-choice items and one free-response item. The multiple-choice items introduce a resource to be allocated (e.g., time, money, importance) and two possible outlets to spend that resource. These two options come from two different wealth dimenstions. Clients are given eight possible responses: definitely choice A, very likely choice A, likely choice A, choices A&B are equal, likely choice B, very likely choice B, definitely choice B, or neither A nor B are important to me. Questions are grouped in threes so that each dimension can be paired against the other dimensions in an apples-to-apples comparison. This is illustrated best by an example of a question group: 1A) It is most important to me that... A) I pass on my beliefs and philsophies to my family. or B) I maximize the financial amount I leave to my family. 1B) It is most important to me that... A) I pass on my beliefs and philosophies to my family. or B) I teach and model philanthropy to my family. Planning Strategies 1C) It is most important to me that... A) I teach and model philanthropy to my family. or B) I maximize the financial amount I leave to my family. Using a survey that is structured this way, the client can indicate priorities accurately by making like comparisons across all three dimensions. The free-response question asks a client to divide hypothetical lottery winnings among several possible recipients across all three dimensions of wealth. This is a directly quantifiable self-evaluation of wealth-management priorities. These responses then are converted from comparative responses and free-response questions to individual numerical scores using the 3D wealth-client survey score conversion formula. 2 The resultant conversions will give a client three different demand scores: the financial wealth-management demand score (F-score), the personal wealth-management demand score (P-score), and the social wealth-management demand score (S-score). Each
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