(Continued)

Course corrections
In today’s slumping markets, clients might well answer, “No.” At least one insurance carrier is offering a tool that helps policyholders make educated choices about changing course. The Hartford, last year’s No. 1 U.S. writer of variable life products, recently introduced a policy feature called Map Report. The feature enables producers and their clients to quickly analyze the performance of the client’s variable policy sub-accounts and determine whether he is still on course for success. If the policy’s underlying investments don’t appear to be on a trajectory to, say, pay product premiums or accrue a certain cash-value goal, Map Report lets the advisor and client calculate change options that would jumpstart the policy’s investment performance and reorient it toward success.

“Many people who purchase variable life adopt a ‘set it and forget it mode,’” says Tim Fitch, senior vice president and product development chief at Hartford. “But variable life is not a tool you can put on auto-pilot.” Map Report, he says, provides variable clients with a safer investment trip. “When you’re driving down the road and you start to go off course, a little tug on the wheel will get you back on the road quickly. If you wait too long, you’ll end up in a ditch, and need a tow truck to get out.”

The IPS helps both client and producer in a bear market.

Similarly, if clients learn early on that investments in a variable policy aren’t performing as well as projected, they can opt for course corrections (such as increasing policy funding for a couple of years) that might be much more painful later on.

Fitch says life pros, who increasingly are asking carriers to provide tools to help them manage in-force business, have received news of Map Report with enthusiasm. “When we explain what we’re trying to do [with the feature] and why we think it’s important, it takes about 10 seconds before they’re applauding.”

The Hartford guarantees policyholders that they may request a Map Report, and any necessary course correction options, at any time. That’s uncommon, Fitch points out, since not many carriers will guarantee a projection of future performance.

Commercial break
Individual investors aren’t the only ones concerned with future performance, says Bob Leeper, managing director in Doylestown, Pa., of Charon ECA, a benefits strategy firm. Employers hunting for investment options to fund corporate-sponsored benefit plans are also looking to advisors for help—particularly for high-compensation employees [HCEs].

Take company-paid life insurance benefits, for example. Through the 1990s, employers were putting defined-contribution money on the table and letting [HCEs] direct the investment of the policy. “Now here we are in 2003, and policies aren’t going to make it because [HCEs] have experienced losses,” Leeper says. As a result, decision-making responsibilities on benefits are shifting back from employee to employer. In the 1990s, “there was never a discussion about what employers were going to guarantee. Now that’s creeping into the dialogue frequently,” Leeper says.

So how do advisors in a scary market broach the subject of guarantees? Leeper says his firm takes a consultative approach: “What are you trying to accomplish and what do you want to accomplish now?” His clients, he explains, are opting increasingly for benefit plans with underlying investments, but without giving investment choices to participants. These include plans like a 401(k)-like supplement plan with a declared interest rate that’s revised annually in accordance with investment performance.

“What we’ve learned overall is that there’s an awful lot of uncertainty,” Leeper says. With accounting snafus and the whims of the market often scuttling investments overnight, a lot more corporate clients “are wanting advice about taking some of the uncertainties out of the equation.”

A Monte Carlo simulation provides the client with a statistical probability of success.

Cool tools
That’s where technology can help. Lincoln’s John Appleton uses Monte Carlo simulations to bolster his clients’ investment performance with the science of statistics. Monte Carlo simulations enable advisors to vault past the traditional forward-planning process that ties future investment performance to past numbers. For example, producers in the 1990s commonly used a projected market return of 10 percent to 12 percent based on market performance over the previous 10 years. Today, advisors typically use a more conservative return of 6 percent to 8 percent. But Appleton points out that saying “x” will happen because “x” happened before is, statistically speaking, based on nothing more than chance. (Just ask any investor who dumped a load of cash into tech stocks in 1999.) Monte Carlo simulations, on the other hand, enable advisors to make investment recommendations based on statistically derived probability.

That’s because such tools help advisors shape projections using a variety of objective factors, such as historical rates of return, asset allocation, time horizons and cash flow in and out of the portfolio, along with more subjective factors such as risk tolerance. Based on such calculations, a Monte Carlo simulation provides the client with a statistical probability of success. If the probability comes out too low, (for Appleton, that’s anything lower than 75 percent), the advisor and client can then “work the problem,” adding more funding, for example, or adjusting the portfolio mix.

Appleton notes that probability calculations have been around as long as the science of statistics, but that it’s taken technology longer to make the science accessible to financial services practitioners. “Technology is catching up with us. It is becoming more available, more reliable and much more accurate.”

Multimedia
In other technology news, New York-based Guardian Insurance & Annuity Co. is offering advisors a CD-ROM suite they can use to help clients manage investments. The tool lets advisors demonstrate investment basics such as dollar-cost averaging, while also encouraging investment with a cost-of-waiting calculator. That calculator shows clients the risk (in total accumulation value of an investment) of waiting one week, one month or one year to begin investing.

Peggy Coppola, vice president of business development at Guardian, says the CD-ROM, which is available to both captive and independent agents, can help advisors engage clients. Instead of a flat, PowerPoint-style presentation, the CD includes film clips, narration and music. One segment shows clips of U.S. presidents going back to the Eisenhower administration giving speeches about Dow-Jones Industrial Average spikes of 400, 600, 800 and higher. The point of the segment is to demonstrate that investors have for decades seen the Dow rise to what they thought would be its ultimate peak—and that they were always wrong.

Guardian’s CD boasts additional calculators, including a seven-year-solution calculator that helps clients meet asset-accumulation goals by dividing investment dollars between fixed and variable annuities, as well as risk-tolerance and retirement-planning calculators.

Finally, on technology tools, Morningstar has two that can help insurance advisors move the investing portion of their business to the next level. One, called Portfolio X-Ray, is featured in both Morningstar’s Principia and Advisor Workstation systems. It enables advisors to dig below the aggregate level of fund-type investments and analyze the style and sector breakdown of a client’s overall portfolio. The other, Goal Planner, is a feature of the Advisor Workstation only. It uses Monte Carlo simulations, but with an added feature: the ability to perform multiaccount, multigoal projections that analyze whether individual elements in a client’s portfolio will work in proper sync to achieve the client’s financial goals.

Chris Boruff, president of Advisor Group, Morningstar, says independent investment advisors have long used these features. But in today’s economic environment, “brokers, insurance agents and other types of financial professionals are now kind of upping the ante.” With ever more sensitive markets, it is no longer adequate to make recommendations based on overall, historical fund performance. Portfolio X-Ray and Goal Planner can help insurance advisors “disaggregate fund-type products down to individual holdings, and do analysis at that level. … That’s what clients now expect and that’s what we need to be delivering to remain relevant,” says Boruff.

Lynn Vincent is a frequent contributor to Advisor Today.

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