FIAs with Volatility Controls-How’d They Do During the Recent Market Downturn?
Published 2-21-2018
The title of this newsletter makes a few huge assumptions that most advisors know:
1) what Volatility Control Indexes (VCIs) actually are
2) that many FIAs come with VCIs
3) how VCIs work inside an FIA
4) how the VCIs on each FIA are different
The bad news is that I don’t have time in this newsletter to explain 1-4 above. The good news is that just released a new WHITE PAPER where I not only explain how volatility controls work, but I also will be going over in detail the various ones in the FIA marketplace.
To sign up for my VCI White Paper, click on the following link:
http://strategicmp.net/vci-white-paper
How did some of the major VCIs do during the recent market downturn?
The two VCIs offered with what I call the “best FIA IMOs won’t tell you about” happen to have done the best over the last few weeks.
To learn more about the “best FIA IMOs wont’ tell you about” that also had the lowest drawdown in the recent stock market correction, click on the following link:
http://www.best-fia-imos-wont-offer.com/new-ms-index
S&P 500 index itself was down 11.66% from its high on January 26, 2018 to its recent low on February 9, 2018. Let’s see how some of the more popular VCIs did during the same period of time.
Best FIA VCI #1 – 3.64% drop
Best FIA VCI #2– 4.17% drop
Nationwide J.P. Morgan Mozaic II Index– 4.98% drop
Athene BNP VC Index– 5.53% drop
Allianz’s Bloomberg US Dynamic Balance II Index–6.05% drop
Athene Shiller Barclays CAPE US Sector Risk Controlled 10% USD Index– 9.12% drop
For this newsletter let me just go over a few of the basics. Most FIAs that use the S&P 500 or other investment indexes simply ride with the market. If the investment index for the first 10 months of a year is up 20% it could crash 20%+ before the end of the 12-month period and the client will get credited ZERO growth.
FIAs that use volatility controls try to lessen the risk and keep gains when the market is going negative.
Volatility Control Index (VCI)-a VCI is an investment index used in an FIA to drive growth that has a “stated volatility control.” What does that mean? It means when volatility spikes, the managers of the VCI rebalance the investment mix to go “risk off.” So, they could go to all cash or they could switch the mix of investments from stocks/mutual funds to bonds or other less risky assets.
Volatility Target-each index will have a volatility target. The higher the target the more “expected” growth, but also more risk will be taken. Generally speaking, target volatility ranges from 5%-10%. When volatility reaches the target, reallocation takes place until it subsides, at which time reallocation happens again.
You can think of a VCI in an FIA like tactical money management in the securities world.
-Some VCIs have annual fees (.25% to 1.5% a year)
-Some VCIs have spreads on the gain (0% to upward of 3%)
-VCIs can use different investment strategies (low volatility, momentum, under-valued, etc.)
-Some VCIs capture 100% of the index returns (some can capture 150%+ of the gains)
-Some VCIs, unfortunately, are two– or even three-year point-to-point strategies
Summary
VCIs are here to stay and they can really help FIAs capture much more of the upside in the market for clients.
All FIAs with VCIs are NOT created equal. It’s tough to sort through the various products. Most IMOs have their preferred products, which I find upsetting, and very few are able to offer the “best FIA IMOs won’t tell you about.”
If you are selling an FIA with a VCI, you really need to get educated on how they work. The best way to learn about VCIs is to read my upcoming white paper. It will be written in plain English for readers to understand and it will have detailed examples comparing some of the most popular VCIs.
To sign up for my VCI White Paper, click on the following link:
http://strategicmp.net/vci-white-paper
Roccy DeFrancesco, JD
269-216-9978
roccy@strategicmp.net
