We Need to Be Better Than This.

I got this comment on my post deconstructing the Allianz Income and Growth Fund:

I think for those who have read my analysis, you can be the judge whether you agree that my analysis is good enough.

One former commission-based adviser does not seem to have a problem with my analysis. I had lunch with a person in the finance field who commented that she agrees with what I have said.

Most importantly, one friend, whom I deeply respect, who works in the fund industry, took the effort to personally call me up to thank me for the thorough tear down and highlighting specifically a critical aspect of the Allianz Income and Growth fund.

He notes that enough people in the finance industry misinterpret that critical aspect easily.

Now… if there is any flaw in my analysis, you can point it out.

Saying my data is skewed and I have bias without showing me where it is skewed and the counterarguments do not help your case.

Here is the thing: I think some parts of the data in my analysis can actually help your case to sell the product if you know how to interpret the data and identify the opportunity to position in your sales pitch. If you read REALLY carefully, it does show something good that is seldom present by others.

Now this person J called me skewed, but he or she seem to think that I didn’t present the fund “bundled with insurance/investment structures that provide capital guaranteed upon death, rather than just looking at an investment at face value on capital appreciation/dividend yield”.

Who is the one skewed here?

I am evaluating the product, without a bias towards a structure, and looking upon it based solely on an investment.

The most I shared is about the dividend payout structure. That is the portfolio manager wearing his or her financial planning hat. I actually show a scenario where the 8% payout last for 31 years!

Is that considered negative?

Perhaps the one who is more skew is J who is trying to taint the analysis by bringing in an insurance and advisory component.

When you bring that in, I will have to bring in the cost of that advisory structure and cost of insurance. Bringing both of these in makes the analysis far more complicated. In actual fact, we should not bring it in because we are solely focused on the returns profile of the fund, against a reference benchmark.

J should be aware that, I have other readers who work in the financial planning industry who recommends funds like the Allianz Income and Growth in a wrap advisory structure. They don’t recommend them always in a variable universal life or investment-linked structure.

My readers can buy this off DollarDex, Poems or through Endowus, which are not through insurance structure.

If I just solely focus on these two structure… then wouldn’t my analysis be…. skewed?

Now let me make comments on two things.

What Happens When You Put the Fund in an Advisory or Insurance Structure?

If you put it in these structure, a large part of whether you get a good outcome from the fund still comes from the returns. Whether the fund in the structure last long enough will depend upon the income drawn from the portfolio, relative to the portfolio value.

But when you put them in an advisory or insurance structure, there is a layer of advisory and insurance cost.

Some of my friends will charge a recurring wrap fee to provide ongoing advise.

Other friends will charge an upfront commission, depending on the investment-linked policy structure. They can be renumerated 50-100% on the first year regular premiums, which eventually goes down over time. But this is not what their clients see.

Their clients will see welcome bonus and loyalty bonus, but also policy charges and additional charges. I will not go too deep into this but interested readers can read my short post on looking at ILP the right way.

If you hold and invest longer, the cost of that advisory under the investment-linked policy structure goes down over time. If you don’t hold long, then the cost is higher.

But whether it is a wrap structure or investment-linked structure, there are an additional layer of cost.

In my analysis, I already show that the fund has high total expense ratio, which seems to prevent it from doing better than a reference benchmark based on the US equity, convertible bond and high yield bonds.

You add one more layer of cost… you are going to make your outcome worse.

This is especially so if you are looking at the solution for income.

Whether your solution last for your retirement greatly depends on mainly the initial income-to-portfolio ratio or the initial withdrawal rate. You can read more of this in my safe withdrawal rate article.

Now… drawing out 8% out of the portfolio value is already challenging enough due to the reasons I stated in my last post. If you go under these structures, you might be like drawing out 9-10% of the portfolio value.

In my study over various market sequences, if you draw out nearly that much, the worst case is that the money may run out in 10 years.

If I were to add those structure into the analysis, it will make your sales pitch look even worse!

Do you want me to show the part where it is very likely your client’s money can only last 10 years when you have promised them more?

Every competent adviser or investment professional should have the common sense that adding more cost affects the retirement outcome.

Then why do your clients look for you to go under a wrap or insurance-advisory structure?

Because you provide value, as an adviser, other than the funds you recommend.

If they do not have you, they may not hold the investments long enough for them to capture the return, to have the financial outcome they desired.

Or are you telling me your value to them is solely based on how good the fund is and that you don’t have any value other than the fund itself?

On Capital Guaranteed Upon Death

Why does J bring up this point?

Is this such a great feature that will tilt the whole analysis so that Allianz Income and Growth Fund will be seen as super good?

This is basically insurance and there is a cost to it.

For 101 Investment-Linked Policy (ILP) Structures, they have different insurance types.

Some 101 ILP provide insurance protection benefit only based on the NAV. This means that if you pay $1 mil in premium and the value drops to $750k, the payout is $750k not $1 million.

You are guaranteed $750k not $1 million, which makes you wonder, what is the difference if I am having the Allianz Income and Growth under DollarDex for example?

Some 101 ILP provide insurance protection with a lock-in. This means that if the value appreciates from $1 million to $1.2 million and then drops to $800k, the insurance payout is $1.2 mil.

Then, some other 101 ILP provide insurance protection based on premiums and not the NAV but only during the period where you are paying the regular premiums. So say you invest in the 101 ILP for 30 years but you only pay the premium for the first 10 years.

During the first 10 years, if the investor passes away, the death benefit is based upon the premium value, subsequently after that, it is based upon the NAV.

Now, I am not so aware whether there is a 101 ILP that has death benefit based on the premiums for the full 30 years but if there are… let me ask readers a question: Do you think that such a product will have a low cost of insurance?

You let me know.

The capital guaranteed is a benefit but if you look at how many different death benefit structures there, wouldn’t the analysis be super confusing if we bring this in?

Whether the investor enjoy the outcome will also depend on luck.

If a investor on DollarDex passes away in the 13th year with the value only 80% of what he or she invest in, will be more than that of an investor in an 101 ILP structure because the payout will be based on NAV AND the 101 ILP investor incur additional advisory cost.

Now Allianz Income and Growth can also be put in a Variable Universal Life structure if you are looking for legacy planning.

That structure is rather different as a variable universal life is an investment + term life insurance but the term life insurance is based on a sum-at-risk model.

I find the insurance sum-at-risk model to be a great feature. The cost of insurance in the variable universal life policy can go down over time as the unit trust accumulates value. When that positive scenario happens, the variable universal life policy is more cost-efficient than an investment + term till 99 policy.

But to accumulate value in that positive scenario… what determines it?

Investment performance and that depends solely on the asset class returns (as shown in my previous analysis).

The structure cannot add value always on it’s own and there is a cost to it. An early surrender of the variable UL will cost the investor more (which he or she shouldn’t be doing unless under stretched life circumstances because a legacy solution is for the long term and you are not suppose to early surrender).

The key benefit that J should have highlighted is not the capital guaranteed upon death but the advantage if you tag on a critical illness rider and waiver on it. If the investor succumbed to critical illness, it might waive off the premium payment.

Bringing in insurance structure makes the analysis so much complicated and I hope you see the point of not adding it in.

Last Word

Either J is a finance professional with a vested interest in Allianz Income and Growth or an investor with Allianz Income and Growth having it in an insurance structure.

I dunno.

The whole post breeds some internal insecurity.

My colleague recently told me that for some, the value proposition of what you are offering, or a product/solution they have bought is so thin that a single, weak truth can easily tear the whole proposition down.

And you fear the repercussions of that outcome so much that you violently rebel against it.

The world does not revolve around one advisory structure.

We should review and evaluate investments for what it is: an Investment.

Be objective about it.

It is not like I am not aware of investment and insurance structures. They make the analysis skewed, not make the analysis more objective.

I never called myself an investment expert.

You gave me that label.

Here is the thing.

I or this teardown, should not have held so much power over whether you get an excellent financial outcome (if you are a holder of this fund in such an insurance structure) or whether you can successfully close your sales (if you are a finance professional).

But maybe you are less confident, and the fate of your passive income stream or sales is tied so closely to one Allianz Income and Growth fund.

If that is the case, all I can say is… your passive income plan or business is built on less-than-solid fundamentals.

Lastly, if you are a professional, stand by your statement and don’t hide behind a pseudo name or an email call [email protected] .

Perhaps you want to post a better and unskewed analysis in the comments. Last I check, the comment section can take a lot of words.

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