Q&A from "Selling Certainty in an Uncertain Market" Special Interest Session - April 27, 2023

 

Advisor question 1: My client has been invested since 2018 but is still losing money, we have implemented asset allocation and it seems not to be working.

Me: May I ask what your allocation is?

Advisor answer: 100% equities

#acgadvice - Asset allocation on the fund level: Knowing that the funds we offer follows an asset allocation strategy may have caused this confusion, an equity fund for example may be allocated to different companies, all these companies however are still ALL invested in the stock market. So, when we experience a general market downturn, the whole investment will be affected.

Asset allocation from the client level: Depending on a client's risk tolerance and time horizon, his investment is allocated to a percentage in an equity fund (40 to 80%) and the balance in a bond or money market fund. The idea is that traditionally stocks and bonds move in opposite directions, by combining these two contrasting funds in a portfolio may temper the effects of natural volatility of the market, periodic review and re-balancing may also provide a mechanism to take advantage of short-term fluctuations. For more info on asset allocation read my blog post #40. Does Asset Allocation really work?

Advisor question 2: My client asked me to prepare a proposal for Critical Illness Coverage, I prepared a 5-pay plan, the premiums to be paid are almost equal to the amount of coverage, this may discourage my client from buying as this shows a very poor return on the client's capital.

#acgadvice - Apples and oranges are not comparable so is life insurance and investments as asset classes, measuring the benefits of a life insurance coverage using an investing metric (ROI) may be the wrong way of determining the true value of a life insurance coverage

Insurance premiums are typically one to five pesos per one thousand pesos of coverage, so using an ROI metric to evaluate the cost/benefit relationship, would this translate to an astonishing return?

The true value of a life insurance coverage (to include CI coverage) should be measured based on 3 factors: First is the stability of the insurer (ensure that the insurance company would outlive you, look at assets and net worth). Second would be Comprehensiveness (what are the number of illnesses it would cover) and lastly third is Adequacy (is the amount of coverage adequate to cover most expenses associated with critical illness), once these are determined, buy the policy with the longest payment terms available (best is 20pay)

Advisor question 3: My client invested in our VUL, because of the associated insurance charges (Cost of insurance, rider premiums, etc.), it always underperforms relative to mutual and unit trust funds.

#acgadvice - This is again a case of trying to compare an apple with an orange, pure investment funds don't have insurance costs, so they also don't have insurance protection

consider an investment with a 20-year time horizon, in twenty years the investor will get old, as he gets older the chances of him getting sick becomes higher, what if midway in his investment horizon he contracted a critical illness? he may have to take out money from his investment to pay for treatments, because the funds are now spent, he may have to forego the realization of his financial goal.

Getting a VUL with CI rider will mitigate this risk, if the same scenario happens, the investor simply claims on CI rider to cover his medical expenses, his investment fund would continue to grow allowing him to realize his financial goal.

All the best my friends!

#acgadvice

PIFAAP's First Post Pandemic Special Interest Session - April 27,2023 9AM

Uncertainty is all around us, never more so than today. Whether it concerns a global pandemic, the economy, or your finances, health, and relationships, much of what lies ahead in life remains uncertain. Yet as human beings, we crave security. We want to feel safe and have a sense of control over our lives and well-being. Fear and uncertainty can leave you feeling stressed, anxious, and powerless over the direction of your life. It can drain you emotionally and trap you in a downward spiral of endless “what-ifs” and worst-case scenarios about what tomorrow may bring.

Dealing with Uncertainty - HelpGuide.org

“SELLING CERTAINTY IN AN UNCERTAIN WORLD” is a talk I have prepared to discuss the top 3 certainty issues facing financial advisors today.

First is the issue of “are we certain of returns?” – the market has been very difficult in the last five years, some clients who bought from me five years ago are still nursing a significant amount of “floating losses”, while most agreed to stay put and stick to their financial plan. 

here I would provide economic update and insights as to where the market is now and its prospects going forward.

Second is the issue of “are we certain we are protected?” – People in our profession is called Insurance underwriters in the past, now we preferred to be known as financial advisors or wealth managers. Are we losing sight of what we are really meant to be to our clients; as their “chief risk manager?” Life Insurance is primarily a risk mitigating product, while investment returns will always be desired, it should not be offered as an investment solution.

Third and the most important issue of “are you certain to succeed?” – Yes, the market is admittedly very difficult right now, but should it be a factor in the pursuit of our own dreams and aspirations? What are the things that may be holding us back?

I am very excited to share with you these insights, see you all on April 27 in our first post-pandemic face to face Special Interest Session

#acgadvice