What kind of portfolio is this?
In the course of doing insurance summary and review, I have come across many Investment-Linked-Policies (ILP) in client’s insurance portfolio. How they came into getting ILP is another story altogether. What troubles and baffles me is how the investment portfolio is constructed.
The vast majority of ILPs are heavily or totally invested in the riskier markets, with funds investing into China, India or the emerging markets being very popular among the selected funds. Some ‘portfolios’ are even solely into China and India. What kind of portfolio construction are these?! They are not even fit to be called portfolios. Instead, we just just called them junk.
When recommending ILPs, some advisers will sell base on, u guessed it, hype. They talk about how high the returns have been over the last couple of years, how these markets cannot fail. When constructing your so called portfolio, only hot funds are selected. This is easy. No research is needed. Not much investment knowledge is needed. No convincing is needed. The funds will just sell by themselves.
Another ‘advantage’ of doing such 1 – 2 fund portfolio is that minimum rebalancing is needed. What is there to rebalance if there is only 1 fund? This is another way to save time and effort for more prospecting and sales work. For those who have had ILP for some years and had been promised that regular review or rebalancing will be done by the adviser, ask yourself, have the promise been kept? Such things are extra work for the adviser with no additional income. The adviser is not affected if the ‘portfolio’ boom or bust.
A gradual shifting of portfolio to less risky composition is needed as one ages and the need for stable returns rises. For those with ILP, make sure that such portfolio reconstruction is done in the future. Remember, you will lose your coverage if the cash value is zero or negative when you are old. As the insurance charges increases as you age, a great deal more investment units may be deducted when there is a bear market (think of the situation now) if the portfolio has not been shifted to a conservative 1. Such scenarios will greatly increase the chance of losing both your coverage as well as cash value. This is a potential time-bomb ticking away for many policy holders if the adviser is not interested in the monitoring and reviewing the portfolio.
Why did I describe it as a time-bomb? The reason is that ILP have a relatively short history in Singapore and many of the policy holders are still relatively young. The bomb may not explode in the next 20 years.
Make sure you are not carrying a bomb with you.
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Tags: ILP, Mis-selling
