However, that certainly is not meant to imply that we do not provide value for our clients when we manage their portfolios. On the contrary, that value is enormous. It’s just that it cannot be accurately measured. Most of us are familiar with Dalbar. In the 2014 update to the company’s Quantitative Analysis of Investor Behavior report, Dalbar conclusively demonstrates that average investors continue to chase investment returns to the detriment of their pocket books. Most likely motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns.

Not surprisingly, most investors are unable to time the market and they may be left with equity fund returns that are lower than inflation. Since the inception of Dalbar’s report in 1984, the average equity investor earned a paltry 3.69% annually, while inflation was 2.8% and the S&P 500 index earned 11.11% annually for 29 years (1984-2013). And of course, this huge difference between investors’ returns and market returns is most likely due to individual behavior, particularly during down markets.

So it is not necessary for financial advisors to tell clients that beating the market is their primary value. Dalbar has demonstrated that, when left on their own, average investors got returns that were more than 8.3% lower than the market! As advisors, you do not need to beat the S&P to deliver value to your clients. You provide discipline. You see to it that they don’t overreact to market swings. You stop them from doing the things that average investors do that cause them to get inferior returns. (How many advisors protected their clients from overreacting during the 2008-2009 downturn?)

Yet there are far too many planners who diminish the importance of this discipline and judge themselves on their ability to beat some index. They fear clients won’t pay their fees if they don’t. They feel they must provide “alpha,” which they define as the return over some arbitrary benchmark that has nothing to do with their clients’ goals. And that alpha must be higher than their fees, or their clients will fire them.

By trying to justify the fees they charge by using some quantitative measurement, they may be setting themselves up for failure. We all know the technical definition of alpha, but financial life planners need to define it differently for their clients.

First, if we look at what we do quantitatively, the return we provide should be better on a risk-adjusted basis than what the clients’ would have gotten if left on their own—not a return above some index. However, that is very difficult to measure because we have no way of knowing what their results would have been had they not engaged our services. But Dalbar has certainly provided us with a clue of how well the average do-it-yourself investor does. In fact, if the return of the equity portion of the portfolios you managed for the period studied by Dalbar were 2% below the S&P, you still would have benefited the average investor by over 6% per year. We know of no advisor who is charging 6%!

However, if we stray from the technical definition of alpha and define it as “value we provide for our clients,” then the term takes on a much broader meaning and defines who we are as financial life planners and what we do for our clients. Alpha, if we insist on a quantitative measure, could be reaching or exceeding the client’s financial goals.