i-PRT Advisor User Guide

A key to improving investor returns & asset retention

Introduction

The Investor Panic Relief Tool (i-PRT) is intended to provide easy alternatives for panicking investors who are actively seeking to withdraw their investments during down markets. Such withdrawals historically cost the average investor 2.26% of assets in the form of lower returns.

Providing timely alternatives limits these imprudent withdrawals thus helping to recover the shortfall and retain the assets for the respective institutions and advisors.

The alternatives provided by i-PRT are varying levels of insurance against market losses in the form of Index Puts. I-PRT simplifies these instruments by using a set of assumed factors to require minimal information for preliminary results. i-PRT then provides unlimited flexibility by permitting advisors and knowledgeable investors to override these factors. These overrides enable results that exactly match the situation and preferences being evaluated.

This guide describes the proper use of i-PRT and helps the advisor to act in client’s best interest, and in so doing, relieve the panic that leads to imprudent withdrawals.

Investor Experience

The following diagram illustrates the assumed use of i-PRT that leads to an informed decision by the investor. An informed decision will most often prevent imprudent panic withdrawals.

The diagram illustrates that investors are influenced by more than a single event. The influence extends to the negative reinforcements that are experienced. As noted, there are a variety of sources for the negative reinforcement, some of which are more controllable than others. Investor statements, Websites, Phone Centers, H/R Benefits departments and to some extent, Social Media are controlled by institutions and advisors. It is incumbent on institutions and advisors to avoid negative reinforcement.

The diagram also shows that when an investor decides to act, there are a number of ways in which the investor may reach out. Each of these points of contact should be prepared to respond effectively to the investor. This guide assists in that preparation.

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Typical Interactions

The interaction with the investor can begin at any of several contact points such as:

  • Websites
  • Mobile app
  • Phone center
  • Advisor
  • H/R Benefits

Determination if Withdrawal is Based on Panic

An i-PRT qualified contact is first able to determine if the withdrawal is in the normal course of business or in response to a temporary event. This determination is made by observation and/or from the response to explicit questions.

Observations are made from:

  • Unsolicited comments
  • Withdrawal is for 100%
  • Tone of voice
  • Ability to have a calm and rational discussion
  • Previous withdrawal behavior

If observations indicate the likelihood of panic or if observations cannot be made, explicit questions are asked, with care to avoid further alarming the investor. Possible non-alarming questions include:

  • “Is this withdrawal intended to fund something specific?”
  • “Are you aware that this investment is not at its high point?”
  • “Have you reached your investment goal?”
  • “Does your current asset allocation give you the protection you need?”
  • “Did you know your investments are worth xx% more than you paid for them?”

If it is determined that this investor is probably not panicked, the next step is to immediately execute the requested transaction.

If the investor is likely to be in a panic, let the subject drop and instead propose the use of i-PRT as an alternative way to protect assets from loss but maintain advantage if the market should rise.

Proposing Use of i-PRT

After determining that the investor is probably acting out of panic, i-PRT can be introduced after acknowledging concern. The acknowledgement reflects the communication that led to the conclusion that there is likely to be panic.

The introduction can take one of the following non-threatening forms:

  • “Are you aware that you can protect your investment while still holding on to it?”
  • “Would you be willing to give me a couple of minutes to describe an alternative to the withdrawal you are making?”
  • “This withdrawal could cost you in lost profits if the market should go up. Would you be interested in an alternative that protects you from loss while also avoiding that cost?”
  • “Would you mind speaking to my colleague about some alternatives that protect your portfolio from loss?”
  • “Are you aware of the taxes [and fees] you will have to pay? May I show you a way to avoid those taxes [and fees]?”

If the investor expresses an interest, the next step is to describe the alternatives evaluated by i-PRT. If there is little or no interest, immediately execute the requested transaction.

Describing i-PRT Alternatives

The following language should be altered to fit the specific circumstance:

“The alternative to the withdrawal I will do for you is to use the investment strategy that large insurance companies have been using for 100 years to protect their own money. This strategy is now available to the individual investor with the help of a tool known as i-PRT, which stands for ‘Investor Panic Relief Tool’.

Through this tool I can:

  • Do a quick initial assessment to give you an idea of what will happen to your investment if the market goes down and if it goes up. This will also give you an idea of costs. I will review these results with you. [Since I already know the current value of your investment, I need no information from you to do this.]
  • If you are still interested, the next step is to fine tune alternatives that best match your personal situation. The result will be an alternative to the withdrawal you intend to make, but saving the taxes, [fees] and other consequences. I will have to ask you a few questions to do this fine tuning.
  • After deciding on an alternative, I will get a specific quote which may be somewhat different. I will then use i-PRT to test this quote and show you the projected results if the market goes down and if it goes up.
  • If you agree that this is what you would like to do, I will place the order and start the protection of your assets.

If the investor agrees to this course, start by running an i-PRT report and review it with the investor.

The investor’s account is then monitored and a determination is made to sell, if the Put is in the money and if not, to exercise at expiration.

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Opening a Case

Opening a case on i-PRT requires only the dollar value of the portfolio assets being protected. From this, i-PRT uses internal factors to produce an initial assessment.

Requested Information

While no other information is absolutely required, there are several ways the case can be customized at the opening.

This information does not affect the i-PRT results but is displayed on the i-PRT report and is very helpful for identification:

  • The individual running the i-PRT (Prepared by)
  • The individual for whom the i-PRT is being run (Prepared for)
  • A Reference identifies the purpose of a specific i-PRT run.
    “Initial Assessment” is preset and can be changed to other descriptions such as “First Revision”, “Low Cost Check”, “Check on XXX Quote”, etc.

This information can be changed and affects the i-PRT results:

  • Current Value of Portfolio is the amount to be protected from loss. This should include the value of equities that are subject to losses. In a later stage of the i-PRT process, these holdings are matched with the most appropriate index. Reducing this value reduces the cost of the protection.
  • The Term is preset at 1 and refers to the number of months for which the coverage is needed. Increasing the term will increase the cost of the protection. Note that the Put can be sold sooner based on market conditions.
  • The Calculate button instructs i-PRT to perform the calculations that produce approximate results.

In addition to the information provided at the opening of the case, results produced include the following. (Please refer to sample report)

  • Index used: Identifies the index on which the Put option is based.
  • Initial Index (strike price): The assumed price of the index at the time the Put is purchased.
  • Estimated Cost: The dollar cost of Puts required to protect the Current Value of Portfolio.
  • Buy Order: The specific order that is executed to provide the required protection.
  • Outcomes: The results are shown for each of three alternatives under nine different market scenarios, including a maximum decline, a maximum increase, no change and variations in between.

After opening the case, it is recommended that the “Download Pdf” is selected and the resulting report retained for use with investor and maintained for the record.

Armed with these preliminary results, the investor is asked to decide to proceed with protection or not based on considerations contained in the next section (First Critical Decision).

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First Critical Decision

The i-PRT approximate results are used to make the critical decision of whether protection is worth its cost. This decision is informed by the estimated costs, the outcomes under various scenarios of future market rises and declines and the following key facts1:

  • The likely outcome of each of three alternative courses of action:
    • Withdraw investments…
      Outcome: Lose no more but never recover the loss already incurred (100%)
    • Purchase protection…
      Outcome: Pay the cost of protection and recover loss within one year (83% likely)
    • Take no action…
      Outcome: No protection but recover loss within one year (83% likely)
  • The likelihood that market will fully recover is high.
    • Within one month: 38%
    • Within three months: 55%
    • Within one year: 72%
  • The likelihood of a lower market is low:
    • Lower market after one month: 36%
    • Lower market after three months: 27%
    • Lower market after one year: 25%
  • Likelihood is low that gains derived from protection will cover the cost:
    With $100,000 and…
    • One month of protection, cost is covered in 27% of cases
    • Two months of protection, cost is covered in 22% of cases
    • Three months of protection, cost is covered in 15% of cases

Worst Case Scenarios

There were six periods (1% of cases) in which recovery took more than three years:

Date Months to Recovery Date Months to Recovery
Sep-2000 67 Jun-2001 41
Oct-2000 66 Jul-2001 40
Nov-2007 51 Dec-2007 40

Conclusion

It is evident that the investor is better off statistically and economically by taking no action. There are several reasons why this “Best Choice” may not be an alternative, in which case the purchase of protection is next best. Reasons that taking no action may not be an alternative include:

  • Fear of mortal financial danger
  • The small risk of non-recovery cannot be tolerated
  • Requirement from authority figure(s) to protect assets
  • Personal preference to take zero risk
  • Current emotional state makes rational decisions impossible
  • Don’t understand the alternatives
  • Funds are needed immediately
  • No funds available to purchase protection

Course of Action

If investor decides that purchasing protection is the desired course, the initial assessment should be optimized to best fit the specific circumstances.

1Statistics presented here are based on the S&P 500 over the 35 year period beginning in 1964 and includes major market events such as the crash and recovery of 1987, the tech wreck and dot com bust, the 9/11 attack and the economic meltdown of 2008.

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Fine Tuning

i-PRT includes several factors in addition to those described in the Opening A Case section. These can be altered to best fit the investor’s preferences, circumstances and current market conditions. Each factor has a Normal value and an Override that changes what the calculations use.

Fine tuning involves testing several alternative combinations of factors with the investor until the optimum fit is achieved. After the best fit is achieved, the advisor obtains and evaluates one or more actual quotes for purchasing the desired Put.

It is critical that during the Fine Tuning stage, a clear and unique Reference is used to identify each alternative tested. This Reference replaces the preset “Initial Assessment” language that is described in the Opening a Case section.

Index Used

Several indexes are provided on a menu or the advisor can use the Other option to enter an index that is not listed. If the Other index is used, the advisor is required to also enter a closing price.

Advisors override the normal index to better match the investor’s portfolio. For example, the Normal index is the S&P 500 mini which is suitable for modest sized portfolios (under $1 million) consisting primarily of large cap domestic stocks.

  • For larger portfolios, the mini index need not be used.
  • If the portfolio composition is not primarily large cap domestic holdings, the index can be changed to one that is a better match.
  • If there is a mix, the protection can be split into multiple subsets, each using the appropriate value and index.

Max % Change

The Max % Change specifies the most extreme decline that the investor would like to consider. This value is automatically inverted to represent a corresponding gain as well as seven values between the two extremes. Results show outcomes for each of the nine values.

If the investor would prefer to test a range other that the Normal -20%, this is overridden to any desired value between -0.01% to -100%.

Cost per Contract as %

The Cost per Contract represents a 1 month Term but can vary greatly with market conditions. The Normal value is set at 1.5% and is overridden when the Term, choice of index and market conditions dictate.

The final Cost per Contract is derived from actual quotes.

Multiplier

For Puts that may not be sold in multiples of 100, the advisor can override this factor.

Leverage

The Normal Leverage is set to 1.2 so the protection exceeds the value of portfolio by 20%. This produces an advantage for the investor in the event of a market decline and covers the cost of the Put sooner.

The Leverage can be lowered to reduce the cost of the Puts being purchased but also lowers the protection.

The Leverage can be increased if the investor chooses to be more speculative.

Number of Contracts

The Number of Contracts is calculated based on the preceding factors but may also be overridden if necessary.

Brokerage Commission

The Normal Brokerage Commission is set at $15 but the actual commission is expected to come from a Quote received (see next section).

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Evaluating a Quote

The Order instructions generated by i-PRT are used to obtain a firm quote. The quote information is used in place of any Normal or Override factors. Results produced from the quote reflect the most accurate costs and forecasts based on Put options that are available at the time.

Quotes are obtained from different sources, depending on the advisor and investor’s specific situation. Examples are:

  • Within an employer sponsored plan.
    In this case, a Self-Directed Brokerage Account (SDBA) is required and the plan participant must be qualified to trade options.
  • From an advisor qualified to sell options.
    This advisor can obtain the quote and place the order. If the advisor is not qualified to sell options, the order can be referred to an associate who is qualified.
  • In an IRA account.
    Using an IRA account has the advantage of tax deferral or if a Roth, the tax is avoided completely.
  • In a brokerage account.
    An investor may also choose which brokerage firm to use.

Quotes may vary from the Initial Assessment and Fine Tuning in several ways. For example, Quotes may involve:

  • Secondary Market and not written for the specific case.
  • Put Pricing may differ from the assumed rates based on volatility, intrinsic value, or other factors.
  • Term may be realigned to align with Options expiration schedules.
  • Index Price which will have changed.
  • Brokerage Commission that differs from the assumed rates.

It is critical that during the Evaluating a Quote stage, a clear and unique Reference is used to identify each quote tested. This Reference replaces the preset “Initial Assessment” or language used in the Fine Tuning stage.

After a quote is accepted and trade executed, the task becomes the monitoring of the index and Puts.

  • When the Put is In the Money, a determination is made if it should be sold to recover portfolio losses or held to expiration.
  • When the Put is Out of the Money, no action is needed.
  • When the Put approaches expiration it is exercised if In the Money.

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