Illustration Software Quick Start Guide

Transcription

1 Illustration Software Quick Start Guide The illustration software is primarily designed to create an illustration that highlights the benefits of downside risk management and illustrates the effects of Sequence Risk on a portfolio. This guide will serve as a general reference on how to use the software and provide some basic talking points on the illustration that the software creates. For additional training see the help section in the illustration software. Contents Illustration Software Quick Start Guide... 1 Process Overview... 2 Information Needed To Get Started... 2 Step #1 Inputting your Positions for Analysis Step #2 Generating Your Illustration... 3 The Illustration... 6 Section #1: The Balance Sheet... 6 Section #2: The Snapshot... 6 Section #3: Top Positions Analysis (Current Portfolio)... 6 Section #4: Position Comparison... 7 Section #5: Current vs. Repositioned 1,3,5 & 10yr returns... 8 Section #6: Repositioned Portfolio Top Positions... 9 Section #7: Current vs Index - The close part 1/ Section #8: Current vs. Repositioned- Close Part 2/ Section #9: Drawdown Illustration - Close Part 3/ Creating Illustrations for Portfolios Using The Megaphone Portfolio Theory Method Step #1: Creating Your Risk Profile Step #2: Customize Your Megaphone Portfolio Theory Allocation Step #3: Creating Your Illustration Creating Investment Policy Statements (IPS) Important Disclosures Warning Against Cherry Picking... 16

2 Process Overview Gather Client Statements Enter Top Holdings For Research by Radical Radical Staff Researches Positions & Adds to Software for Analysis Create Illustration and Download Print Ready PDF Information Needed To Get Started The first step to creating your illustration is to enter in you clients portfolio positions in the analysis software for research. When entering positions you are looking for the 5-10 positions that make up the bulk of the clients assets that are currently invested. Positions should ideally have history going back to 2000 or earlier. Step #1 Inputting your Positions for Analysis. To start your illustration, login to the illustration via the precision website login tab or direct via and click on the new illustration link. For each of the clients positions, type the symbol in the column on the left. If the fund is in our database and ideal for illustration a green checkmark will appear. If the fund is in our database, but does not have performance data going back to yet a warning triangle will appear. Letting you know that the symbol isn t ideal of analysis. And if we don t have any performance data in our database for the entered position a red X will appear indicating that the position will need to be researched by our technicians and entered in to the database before an illustration can be created. If you need to add more than 10 positions for analysis, you can use the located at the bottom left of the form. Add Row link, Once you are done entering your positions, hit the next button. If the positions are in the database and ready for analysis you will be taken to the next page, otherwise you will get a message saying The positions you requested for analysis will be added to our database within 1-2 business days. Once they are added you will get an notification with a link to generate your report.

3 You can always check on the statuses of your requests by going to the My Lookup Requests link on the left navigation menu. Quick Tip: When entering positions you can quickly see the inception year for the position by looking at the Inception Year column. Additionally if the performance data already exists in our database, you will be able to see the cumulative return for the position since 2000/inception your whichever is greater. Step #2 Generating Your Illustration Once your positions are ready for analysis, you will be taken to the Step 2 screen, this screen is where you will enter in the information that will be used to generate your illustration. Section #1 The Balance Sheet: In this section you want to enter the totals for the prospective client s various accounts. In the owner column enter in the name of the person(s) who are listed on the accounts. Enter in the company that the account is with, select what type of account it is (tax status). Under the next 7 columns you want to enter in the totals that the person has in that account. For example, add up the value of all the stocks held in the account and enter the total in the stocks column, make sure to only enter in numbers. Do not enter dollars signs ($), symbols, letters, commas, etc or the analysis will throw an error when it generates. Section #2 Portfolio Comparison In this section we are going to compare the prospective client s current positions with comparable PCM strategies. When choosing strategies to compare try to pick PCM strategies that would have similar objectives to their current position. For example, when picking the comparison strategy for an Equity income strategy pick a PCM strategy whose goal is to provide equity income. The goal is try to make the comparison as apples to apples as possible. Cumulative return (since 2000/inception) and inception years for clients current position. Client s Current The PCM Strategy to compare it to, The firm only transacts Positions business in states where it is properly registered, NOTE: or is you excluded must or choose exempted a comparison from registration strategy for all positions.

4 Quick Tip: The cumulative return rates for the PCM strategies can be found next to the name of the strategy in the dropdown box. For example the PCM Equity Income % had a cumulative return of % since 2000/inception. Section #3 Recommended Portfolio In this section we are going to build the recommended/repositioned portfolio for the client. This section uses a 3 bucket model; Bucket #1 FIA, Bucket #2 Low Risk, Low Volatility strategies, and Bucket #3 Moderate Volatility. The strategies in each category are reviewed and updated periodically by the Precision Investment Committee. Each Bucket will only show the investments that are appropriate for that bucket/risk level. Quick Tip: The FIA s are named using the following conventions Return Rate FIA Cumulative Return if held since 2000 So a 3% FIA would be 3.0 FIA 55.8% Section #4 Additional Settings In this section we are going to set the final settings that will be used for creating the illustration, those settings are: Income Drawdown Type & Amount: Fixed Dollar Amount: If your client has a fixed amount that they need to withdraw during retirement, you can use that fixed amount for the income drawdown simulation. For example, if your prospective client s needed to withdraw $15,000/year of income from their investments. You would select Fixed Dollar Amount and enter in the Drawdown Amount box right below.

5 Inflation Rate: Fixed Dollar Amount Adjusted for Inflation: Similar to the above, except it will increase the amount each year by the hypothetical inflation rate you set in the next setting. Fixed Percentage of Portfolio Balance: This by far is the most common option and allows you to illustrate how much they d be able to withdraw and what affect it would have on their portfolio if they withdrew n% each year. Just like with every other area in the software, when entering in the percentage about just enter in the number without any symbols or other characters. So for 4 percent just enter 4 in the drawdown amount box. Select a hypothetical inflation rate that will be used in the illustration software. This number is used on the Position Comparison pages and in the Income Drawdown illustration if the Fixed Dollar Amount Adjusted for Inflation option is selected. Just FYI: The Fed has an inflation target of 2% a year ( Benchmark Index: As part of the illustration, the client s current portfolio is compared against a market benchmark. Using this option you can select the benchmark that best matches the majority of your client s current portfolio. If there s a benchmark you would like added, leibel@radicalpromoting.com your request to have the benchmark added to the software for illustration. Current Advisory Fee: This allows you adjust the returns for the client s current positions to reflect their current advisory fees. PCM strategies are automatically net of 2.25% advisory fee. Inception Year for Illustration: Client Name: This allows you to specify whether you d like to create an illustration going back to 2000, or starting in If you specify 2000 and there are positions that don t have data going back to 2000, a 0% less advisory fees return will be shown for each year we don t have performance data. This is the name you d like to give to the illustration, it s purely for your purposes. One you are ready, hit the Create Analysis button. If there are issues with your selection you will be notified. Please note: at this point all funds must have either a green or orange symbol next to them in order to proceed. Any red X symbols will cause the illustration not to generate.

6 Only number 0-9 in this box, do NOT use $, %, commas, etc The Illustration Section #1: The Balance Sheet The first page of the illustration is a simple balance sheet, it s a direct reflection of what you entered in section #1. Section #2: The Snapshot In the snapshot we present the prospective client s top positions. The idea is to (1) get the clients buy in that this is the top positions that make up the majority of their portfolio and (2) demonstrate to the prospect that when you just look at the 1, 3, 5 & 10 year return numbers their portfolio looks good. However, It didn t do too well in 2008, but recovered in 2009, however their beta/volatility is a little high. This set us up for the next page Section #3: Top Positions Analysis (Current Portfolio) In the last page we showed our prospective clients that their 1, 3, 5 & 10yr return numbers looked good, however when we look at the returns since (2000 or 2008 depending on your selection.) What we see is that the actual average return is actually quite a bit less than what the 1, 3, 5yr numbers show. In fact your portfolio only actually returned n%/year and as you can see in the red there was significant volatility with those returns.

7 Section #4: Position Comparison The next set of pages are designed to compare the client s current position with a comparable PCM Strategy. Continuing the conversation from the last page, When we looked at you positions and compared them to similar PCM strategies this is what we found (See the letters outlined on the illustration on the next page.) a) Since 2000/2008, x strategy had a cumulative return of n% b) Which beat/loss to inflation by n% c) However, when we compare it to a comparable PCM strategy, you could have gotten a n% return d) With n% less market volatility e) That s a n% gain That s pretty significant wouldn t you say? If you can highlight the fact that the main reason why PCM strategies have better returns is not because they have extended, if any years with above average returns, rather it s because they have a downside risk management strategy that keeps them from losing significant amounts during down years. As you can see in the chart below, the IBM position had 6 negative years totaling a % loss. While the PCM strategy only had 3 down years, totaling 11.7%.

8 Section #5: Current vs. Repositioned 1,3,5 & 10yr returns Continuing the conversation, we are now going to present our repositioned portfolio. The repositioned portfolio that takes advantage of downside risk management. The same way we analyzed the client s portfolio, we are going to analyze the repositioned portfolio. (This is what you did in section #3) There is a lot of detail you can go in to on this page, we are just going to highlight the basics. (See the illustration on the next page.) a) At the top of the page we have the same 1,3,5 & 10yr numbers we showed you before. b) The bottom section shows the 1,3,5 & 10 year numbers for the repositioned portfolio (broken down by buckets.) c) At the bottom, we have the average numbers for the repositioned portfolio (b), and the difference between the current portfolio and the repositioned portfolio. What we want to do is highlight the following the fact that the beta on the new portfolio is significantly different and that the 1,3, 5 & 10 year numbers for the repositioned portfolio look pretty good.

9 Section #6: Repositioned Portfolio Top Positions The same way we analyzed the prospects portfolio, we are going to do the same for ours. On the page we are going to look at the yearly and average returns for the Repositioned portfolio. A. Benchmark Index Returns for same period B. PCM Yearly Returns, notice how few red years there are compared to your current portfolio.

10 C. This is the average return for the repositioned portfolio D. This is the average returns for the prospects current portfolio E. The Delta is the difference between the repositioned and the current return, negative numbers are in favor of the repositioned portfolio. Section #7: Current vs Index - The close part 1/3 Now we setup the close, part #1: compliment their BD/current advisor. In continuing your conversation with the prospect all of this isn t to say that your BD did a nada Job, the truth is that when we compare your current portfolio to the [index you chose], your BD actually didn t do a bad Job. A. The [insert name] index is his benchmark, B. and he beat it by n% Section #8: Current vs. Repositioned- Close Part 2/3 Now present the PCM solution. However, when we compare your current portfolio to our repositioned portfolio you could have increased your assets by $x with n% less volatility.

11 Section #9: Drawdown Illustration - Close Part 3/3 This all becomes really important when we start talking about income drawdown. As you can see in your current portfolio, assuming market conditions repeat themselves A. You would be been able to start withdrawing $9,301 B. Which is 4% of you portfolio balance C. And if you would have continued taking 4% each year, at the end of 15 years you would have been withdrawing a little over 12k D. And your portfolio would have grown by about 35%, which really isn t bad. E. However, when we compare it to our repositioned portfolio. You would have started taking the same amount. F. However after 15 years you would have been withdrawing 13.4k and still have grown your assets by 49% G. All with 72% less volatility H. Now, which portfolio would you rather have your current one (red) with all its volatility, or the repositioned one (blue.)

12 Creating Illustrations for Portfolios Using The Megaphone Portfolio Theory Method. Starting with Version 2.0 of the Illustration Software you will now be able to create portfolio illustrations utilizing PCM s new Megaphone Portfolio Theory system. The Illustrations created are nearly identical to the current portfolio illustrations with the exception of the repositioned portfolio, which is now a composite created using the Megaphone Portfolio Theory Wizard and Risk Questionnaire. To use a Megaphone Portfolio Theory in your illustration, start the wizard by clicking on the Start The MPT Wizard. Step #1: Creating Your Risk Profile The first step in creating your illustration is to fill out PCM s quick 13 question risk questionnaire (see the image below), the answers to these questions will determine the recommended portfolio. You can also choose to load an existing profile by selecting it from the drop down menu and click the Load button. The risk questionnaire is 12 multiple choice questions, as you click on the answer to each question it will automatically save your answer and move on to the next question. You can always go back to a previous question by clicking the Previous button or by clicking on the question number directly. A print version of the questionnaire is available for download by clicking on the Download Print Questionnaire link from the menu. Step #2: Customize Your Megaphone Portfolio Theory Allocation Once you complete or Load a risk profile the system will automatically show you the recommended allocations based on the Megaphone Portfolio Theory. You can customized the allocations by either modifying the allocations directly or by using the risk slider to adjust the risk level of the profile, see the image below for details.

13 Risk Profile Score You can also directly edit the allocations by using the +/- buttons. Adjust the score +/- to choose a more conservative or aggressive allocation. Based on your selections the system will show you the Megaphone Zone of your Portfolio, Beta and Max Drawdown since 2008 Please Note: The Allocation wizard uses the rules of the Megaphone Portfolio Theory for creating investment portfolios and will only allow you to construct portfolios that fit in to the strict definitions as outlined by the Megaphone Portfolio Theory and the Illustration software. Additionally account minimums and time horizon will be taken in to consideration when constructing portfolios which may limit the number of options allowed for any given allocation. Step #3: Creating Your Illustration Once you have your allocation set, you can create an illustration using your new allocation by clicking on the Create Illustration button. This will launch you through the usual illustration wizard with one major exception. The traditional 3 bucket Recommended Portfolio section has been replaced with the Megaphone Portfolio Theory Allocation Wizard. This wizard will pull the risk profile and allocation information you entered in step 1 & 2 and use them to help you build a target profile that meets the Megaphone Portfolio Theory standard. Additionally please note illustrations created using this method will only show performance data from 2008 and onwards. The rest of the illustration remains the same with the exception of the repositioned portfolio which will show the individual allocations and their performance information as the comparison. See the figure on the next page.

14 Megaphone Portfolio Theory Portfolio Illustration (Current vs Proposed Page) Note the proposed portfolio shows the allocations as set using the Allocation Wizard.

15 Creating Investment Policy Statements (IPS) Investment Policy Statements are short documents that outline the proposal you ve created for the client along with a recap of your reasoning for choosing said allocation. The Illustration software starting with Version 2.0 incorporates an Investment Policy Creation Tool that utilizes the new Megaphone Portfolio Theory Allocation Wizard to create an investment policy statement for your clients. To create an investment policy you can either create a new Risk Profile using the Start the MPT Wizard link on the main menu, or you can go to View Risk Profiles or View Illustrations and click the Create IPS link next to any of the risk profiles you d like to use as the template. Clicking the Create IPS or Create Investment Policy Statement buttons will start the IPS wizard. The IPS wizard is similar to the illustration wizard, at the top you ll have the recommended Megaphone Portfolio Theory allocation. Below that you ll have the investment goals, this is an optional section where you can list the expected withdrawals and/or contributions that your clients will be making. In the additional settings section, you can specify the advisory fee you d like to charge your clients and frequency with which you will hold client reviews. In addition you can specify the benchmark you d like to use as a performance comparison for the investment allocation you are proposing.

16 Important Disclosures Portfolio Positions in non-megaphone Portfolio Theory illustrations are Equally Weighted: The performance numbers for portfolios assume an equal weight for all positions listed. Volatility as Measured by Beta Warning Against Cherry Picking When choosing the positions to include in the illustration it is important that you ONLY pick positions that are representative of the client s portfolio not to influence portfolio performance numbers, which would be a violation of SEC guidelines. If you do need to exclude significant positions then you need to disclose as such to the client, and it is advisable to get a signed disclosure statement from the prospective client stating that you disclosed that fact to them.