Simplicity is key to analyzing complex products

In the May 2011 issue of Investment Executive, I wrote about how I approach the analysis of complex products.  In short, when analyzing products – particularly complex offerings – the most insight is often obtained via the simplest analysis.

To illustrate, I tell the story of how I approached Portus back in the fall of 2004.  I never spoke with the company.  I never delved into their process.  I simply focused on the most basic issues to quickly conclude that this was not a company we wanted to recommended to our advisor-clients.

I then demonstrate a similarly simple framework when speaking of Guaranteed Minimum Withdrawal Benefit products.  One way to evaluate GMWB products is simply to compare to another product offering a similar benefit – i.e. a minimum guaranteed lifetime income.  It’s a pretty straightforward thing to do for those who need to generate an immediate cash flow.

But for those who are some years away from needing the income, I offer a two-year-old article by Dr. Moshe Milevsky.  In this article, Milevsky equates GMWB products to a standard interest rate so that investors can more easily evaluate them in a familiar context.  Click here for more recent columns by Dr. Milevsky on annuities, GMWB products and the like.