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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.
All the best my friends!
#acgadvice