By

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.”

In working with clients, Schultes suggested, brokers should show the advantages of asset allocation. “Provide solid explanations and examples,” he said, “and (show) how this should lead to a properly diversified portfolio.”

It is especially important, he said, to show more than one investment on a hypothetical illustration. Avoid the “one hit wonder” presentations that were often done before 2000, he said. If the broker shows all of the subaccounts in the portfolio, he or she can show how the allocation “evens out the bumps along the way.”

Another suggestion: Offer a “complementary investment analysis” to show the effects of being properly diversified–and of not being diversified. This can help show how the time horizon affects the result, he added. In this analysis, “have the client add some more money to the investments, and let them see the results.”

Finally, brokers should avoid chasing the “hot asset class” or the “fund of the month,” Schultes said.

If a client is looking to accumulate funds, for example, use a risk tolerance questionnaire to help guide the person to an appropriate portfolio, he said. The questionnaire “enables you to re-educate the client and manage the expectations.”

There are questions brokers should ask of clients who want “disbursement” (income) portfolios, too, he indicated.

In both instances, the answers help brokers “map” clients into suitable categories.

In working with allocation, keep in mind that people “are not the same investors at age 35 and 65,” advised Jack Mischler Jr., vice president-annuity sales and marketing, Phoenix Wealth Management, Hartford, Conn.

He noted his own company uses age-weighted–or “life stage”–portfolios, developed with Ibbotson, because of that. Each life stage offers conservative, moderate, and aggressive portfolios, he said.

“We promote this with the broker as (part of) a know your customer” strategy, he said.

“Back-to-basics is not enough” of a message for todays market, concluded Mischler. And the wholesalers who take products to brokers should not be delivering “JAVA” (just another variable annuity).

Brokers want to know more about this topic, he insisted, and there are “requests for a deeper understanding” of model portfolio theory, regression analysis, and so on.

“Insurance companies and broker-dealers need to get their advisors more classroom education” on this, he concluded.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 3, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.