Lake Buena Vista, Fla.
Asset allocation is getting a makeover, in a sense.
At an annuity conference here, speakers devoted an entire panel to the topic, “Whats so special about asset allocation?”
The question is fair game, especially since asset allocation programs have been offered with many variable annuities for a decade, if not more. And most financial professionals are well aware of its common definition–i.e., that asset allocation is “a personalized strategy that takes into account the clients investment goals, objectives, time horizon and risk tolerance,” as panel moderator Steve Putterman put it.
So, why talk about it now? Asset allocation is actually more than what is implied by its traditional definition, suggested Putterman, who is vice president-annuities of Phoenix Wealth Management, Hartford, Conn.
It is, he told the conference, a “balanced and diversified portfolio that reduces the risks associated with investing.” The conference was co-sponsored by LOMA, the Society of Actuaries, and LIMRA International.
By “risk,” Putterman said he meant such things as inflation risk, interest rate risk, economic risk (supply and demand movements), market risk (affected by events and trends), and specific risk (such as picking the wrong company in which to invest).
Given the economic downturn of the past year, and the resulting renewal of public interest in “safe money” products and strategies, the idea of positioning asset allocation as risk-reducer fell on receptive ears.
Many in the audience told National Underwriter they are looking for ways to be sure clients use the allocation programs offered in their VAs, and that clients have “appropriate” allocations–that is, ones suitable to their circumstances and able to enhance likelihood of positive long-term performance. They view this as a bulwark against volatile market jitters, and thus a means of encouraging people to stick with their VAs, even in a down economy.
There are “compelling reasons” to suggest annuities are one of the most appropriate vehicles in which to practice asset allocation,” contended Putterman. One of them is that there are no tax consequences for the investment changes triggered by allocation formulas, he said.
Also, the automatic rebalancing feature “takes the decision away from the client and broker, so there is less inclination to buy high and sell low,” he said. “It creates an ongoing strategy, so people arent timing the market.”
Finally, the allocation models that are available today are more complete.
Allocation is not the same thing as diversification, stressed Adrian Schultes, senior regional manager at Ibbotson Associates, a Chicago firm that provides modeling. One needs to look at the “style exposure” of the portfolio choices, as well as the names and classes of the funds, he said.
“Allocation,” he added, “takes diversification a step further.”