Say a client’s standard portfolio is exposed to nine different asset classes: 1) the broad bond market (represented by the AGG ETF); 2) intermediate bonds (BIV); 3) convertible bonds (ICVT); 4) high yield bonds (JNK); 5) S&P 500 (VOO); 6) value stocks (VTV); 7) growth stocks (VUG); 8) non-US stocks (EFA) and 9) hedge funds (represented by the Eureka hedge fund index).

Next, a client’s investment objective – conservative; balanced; aggressive – dictates the optimization across these asset classes.

Since there isn’t an FIA or RILA industry benchmark, an Allianz Life Insurance Company of North America FIA (Core Income 7; S&P with cap; 1-year point-to-point; 7-year surrender) and RILA (Index Advantage; S&P 500; 1-year point-to-point; 10% buffer; 6-year surrender) are used as proxies.

Integrating an FIA or a RILA adds important risk-adjusted return benefits, chiefly by protecting against losses. Important for asset allocation, an FIA mostly mirrors traditional fixed income metrics but without downside exposure. A RILA, with less downside protection but a higher upside to the target index, fits tightly to a balanced mandate.

And, don’t forget, when FIA/RILA returns are shown, the actual result is even better when the pre-tax equivalent adjustment is made (i.e., return/(1-combined federal and state tax rate)).