IUL Rate of Return Probability Chart (quite eye-opening)!
If you missed last week’s newsletter titled: IUL Rate of Return Probability Chart (quite eye-opening), you missed the chance to download the IUL ROR probability chart. To do so now, click on the following link: https://advisorshare.com/iul-probability-of-return
Using “Projected” Investment Returns to Make Sales is a Loser’s Game
If you will, play along with me for a bit and put your consumer hat on for a second. If a financial planner created a custom portfolio and then tried to sell it to you using the following chart, what would you think? (I added the blue line for emphasis).
Would a consumer think, wow, that’s terrific, that I have a 95% probability of getting a +20% rate of return while risking a -15.1% downturn over the next 6 months?
You might initially think this is a cool chart, but I think it’s a terrible idea to give this to a client!
What don’t I like about the above image?
1) It makes a prediction for the portfolio over a 6-month period. Who in their right mind would give out a prediction saying it’s a 95% probability prediction over any period of time?
And what client wants to make financial decisions when looking at 6-month time frames? Clients want their investments to work over a multiple-year period, not over a 6-month period!
2) The prediction may turn out to be total CRAP! What do you think this “in the market” portfolio might end up being down this year? The market has already been down nearly 25% and many pundits think it could go to as much as 40% down.
What will the client think of this 95% prediction if this portfolio ends up having a max-drawdown of 25%, 35%, or 45%? He/she will think the prediction “sucks” and could start looking for a new advisor.
What should an advisor think of this prediction? You should think it is “stupid” because it was nonsensical from the start, and it could cost an advisor loss of significant AUM.
Where did the above chart come from? Amazingly, it’s from one of the most used Risk software programs in the industry. An advisor forwarded it to me before I did an OnPointe Risk Analyzer demo for him. It’s from an actual portfolio the advisor was going to recommend in November of 2021.
Using “Projected” Returns is Not Necessary to Pick Up New AUM
When we built OnPointe Risk Analyzer, we specifically avoided using “projected” returns as part of the “sales output.” Why?
1) Because eventually your prediction will FAIL and advisors will lose AUM because of it.
2) There are better sales charts and data you can give out to pick up new AUM!
Example Chart from OnPointe Risk Analyzer
OnPointe focuses on backward-looking data and that’s all you need to pick up new AUM.
Comparison: 1) Client current portfolio; 2) A POM.WM multi-manager portfolio; 3) 60/40 mix.
What do you see?
-That the client’s portfolio had a higher Risk Score, higher drawdown, and a lower CAGR.
-The POM.WM portfolio (one an advisor would pitch) had lower risk and higher return.
-The 60/40 mix was better than the client’s portfolio but NOT as good as the POM.WM.
What is NOT in the above chart? A “prediction” about what the portfolio will do going forward.
Which portfolio do clients want? The POM.WM portfolio. Bingo! You just picked up a new client without running the risk of losing the client later by predicting what the portfolio will do.
Newsletter takeaway: Giving clients “predictions” about what portfolios will do in the future is just dumb! Don’t ever give a client a specific “prediction” of what you or the software program you are using thinks will be the maximum negative return over any time frame (let alone a 6-month time frame which makes no sense.) Giving out specific “predictions” will eventually come back to haunt you.
And when you can use a program like OnPointe Risk which has the best “sales” charts in the industry, there is no need to use any Risk software that uses predictions in its sales outputs.
To learn about the industry’s best risk software, click on the following link or image.