SIMON Spectrum is a multi-dimensional tool designed to evaluate structured investments and annuity products across five dimensions: Protection, Upside, Liquidity, Simplicity, and History.
Spectrum is based on Nobel-prize winning Prospect Theory, which suggests that investors view gains and losses differently. Under this theory, investors generally are averse to losing accumulated wealth and generally would choose to preserve accumulated wealth, rather than put that wealth at risk in the interest of seeking gains. In the alternative, investors are more open to volatility and risk when it comes to the realm of losses. By extension, Spectrum assesses Protection and Upside as individual dimensions, rather than an aggregate risk and reward score, to account for this.
SIMON's Portfolio Construction Tool is a multi-dimensional Portfolio Construction Tool designed to evaluate how a generic structured investment or annuity product may or may not further align a hypothetical portfolio with certain investment objectives set by the financial professional. Spectrum uses hypothetical generic products and portfolios in its analysis, using SPDR S&P 500 ETF Trust (“SPY”) as a proxy for equities and iShares Core US Aggregate Bond ETF (“AGG”) as a proxy for bonds and takes into account the reinvestment of dividends. SPY and AGG may not be representative of the equities and bond market as a whole, or any particular equities of bond holdings in your portfolio. In addition, Spectrum only takes into consideration a subset of hypothetical structured investments and annuity products with only certain underliers, which do not reflect the entire universe of structured investments and annuity products that are available or the entire universe of products that could be used in the portfolio. Structured investments and annuity products are made available with many different underliers. Other products and investments may be more suitable for you and may provide the same or greater returns with less risk.
Dimension Scores
SIMON Spectrum considers five dimensions, scored from 1–10:
Protection
This score is designed to account for the historical annualized loss. Spectrum calculates the historical negative performance of the product for all observation dates over the past 15 years from the date of use of the tool in which SIMON has the daily closing price of the underlier. Historical negative performance is calculated as the sum of the negative returns of the product, divided by the total number of all observation days, with an adjustment to account for volatility of losses. The 15 years of historical data is designed to capture performance over various market cycles. A higher Protection score reflects lower historic losses, although such protection is not guaranteed in the future. In addition, a given return profile with higher volatility will have a higher score than the same return profile with lower volatility, due to the preference for volatility with respect to the probability of losses.
Upside
This score is designed to account for the historical annualized gains. Spectrum calculates the historical positive performance of the product for all observation dates over the past 15 years from the date of use of the tool in which SIMON has the daily closing price of the underlier. Historical positive performance is calculated as the sum of the positive returns of the product, divided by the total number of all observation days, with an adjustment to account for volatility of gains. The 15 years of historical data is designed to capture performance over various market cycles. A higher Upside score reflects higher historical gains, although such returns are not guaranteed in the future. In addition, a given return profile with higher volatility will have a lower score than the same return profile with lower volatility, due to the aversion to volatility with respect to the probability of gains.
Liquidity
This score reflects the length of time that money is committed to an investment. Products with longer holding periods have a lower score, while products with shorter holding periods have a higher Liquidity score. To determine the Liquidity Score of structured investments with fixed maturity, SIMON Spectrum measures the term of each product, which is deemed to be the holding period. To determine the Liquidity Score of callable structured investments that may be redeemed prior to maturity, Spectrum calculates the weighted average of the hypothetical holding period of the product based on the historical performance of the product for all observation dates over the past 15 years and the contractual maturity. The Liquidity Score of an annuity product is determined by the surrender period. In the event an annuity product does not have a specified surrender period, SIMON assumes the holding period will equal the length of time of the crediting strategy option with the longest term.
Simplicity
This score evaluates the simplicity or complexity of the product’s structure and its features. A higher Simplicity score indicates a product with a less complex structure or features, while a lower Simplicity score reflects a product with a more complex structure or features. For example, a traditional, broad-based ETF may have a Simplicity score of 10, while a structured investment with a Barrier – European Observation referencing the same underlier may have a Simplicity score of 7 or lower due to its Product Structure and Protection Feature. For an annuity product with various crediting strategies, SIMON uses the lowest Simplicity score out of the crediting strategies available.
History
This score evaluates the length of historical performance data available for an underlier. A higher History score reflects longer lengths of historical performance data available for an underlier, while a lower History score reflects shorter lengths of available historical performance data, over which an investor can assess the performance of the underlier over various market scenarios. For example, an underlier with over 15 years of historical data available would have a History score of 10, while an underlier with less than a year would have a History score of 1. For example, SPY and AGG have over 15 years of historical performance data, and would therefore each have a History Score of 10.
SIMON's Portfolio Construction Tool
For SIMON's Portfolio Construction Tool, SIMON Spectrum provides Dimension Scores for three components:
1) Client Investment Profile – Target Scores:
SIMON Spectrum uses the responses to three questions gauging the investment experience, investment time horizon, and risk tolerance of the client to determine the Client Investment Profile. These responses are submitted by the financial professional. Spectrum determines the client’s Target Scores for the five dimensions based solely on the responses to the questions regarding investment experience, investment time horizon, and risk tolerance.
a) Investment Experience:
Based on the financial professional’s selection from three different Investment Experience categories (Beginner, Intermediate, and Experienced), Spectrum assigns the client’s Target Score for Simplicity.
b) Investment Time Horizon:
Based on the financial professional’s selection from four different Investment Time Horizon categories (investor seeking an investment with a stated holding period of less than 1 year, Short-term (1 – 3 years), Medium-term (3 – 6 years), Long-term (longer than 6 years), Spectrum assigns the client’s Target Score for Liquidity.
c) Risk Tolerance:
Based on the financial professional’s selection from five different Risk Tolerance categories (Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive), Spectrum assigns the client’s Target Score for Protection and Upside. For a given Risk Tolerance category and the financial professional’s selected client Investment Time Horizon, SIMON determines the Target Score for Protection and Upside. Generally speaking, the longer the Investment Time Horizon, the higher the Target Scores for Protection and Upside for the same Risk Tolerance category, given an investor would seek greater protection and gains with a longer-term investment.
Note that SIMON assumes the client’s Target Score for the History dimension is 10, representing products with underliers with 15 or more years of historical performance data.
2) Current Hypothetical Portfolio Assessment:
SIMON Spectrum calculates dimension scores for a Current Hypothetical Portfolio allocated between equities and/or bonds, in weights selected by a financial professional, with SPY as a proxy for equities and AGG as a proxy for bonds. The portfolio dimension scores for Liquidity, Simplicity, and History are calculated using a weighted average of the dimension scores for each component in the portfolio. The portfolio dimension scores for Upside and Protection are calculated based on the returns of the combined components in the portfolio. Given both SPY and AGG have 15 or more years of historical performance data, a dimension score of 10 is assigned for History.
3) Recalibrated Hypothetical Portfolio Assessment:
SIMON Spectrum calculates dimension scores for a Recalibrated Hypothetical Portfolio allocated between equities, bonds, and/or a generic structured investment or annuity product, in weights selected by the financial professional, with SPY as a proxy for equities and AGG as a proxy for bonds, and a structured investment or annuity product with SPX or the lesser performing of SPX, RTY, and NDX as the underlier. The portfolio dimension scores for Liquidity, Simplicity, and History are calculated using a weighted average of the dimension scores for each component in the portfolio. The portfolio dimension scores for Upside and Protection are calculated based on the returns of the combined components in the portfolio. Given SPY, AGG, and SPX/RTY/NDX have 15 or more years of historical performance data, a dimension score of 10 is assigned for History.
Alignment Score
For SIMON's Portfolio Construction Tool, SIMON Spectrum also calculates an Alignment Score, which compares the alignment of dimension scores for a given portfolio allocation to the Target Scores for each dimension, based on the Client Investment Profile. An Alignment Score of 100 would be achieved for a given portfolio with scores for each dimension that are at/above the Target Score for each dimension. The Alignment Score is determined by deducting from 100 the sum of differences in dimension score between the portfolio and the Target Score, for each dimension where the dimension score is lower for the portfolio than the Target Score, multiplied by a fixed scaling factor.
Current Hypothetical Portfolio Alignment Score: Spectrum measures the alignment of the Current Hypothetical Portfolio allocated between equities and/or bonds, in weights selected by the financial professional, to the Target Scores.
Recalibrated Hypothetical Portfolio Alignment Score: Spectrum measures the alignment of the Recalibrated Hypothetical Portfolio, allocated between equities, bonds, and/or a generic structured investment or annuity product, in weights selected by the financial professional, to the Target Scores.
Key Assumptions and Limitations
Investors should be mindful of certain fundamental considerations when evaluating SIMON Spectrum and Portfolio Construction Tool results:
Spectrum is premised on a number of assumptions, and has certain inherent limitations, as it uses hypothetical products and portfolios in its Portfolio Construction Tool assessment. SIMON makes no assurance or guarantee that Spectrum accurately predicts performance of any underlier or product. Spectrum cannot account for all financial risk that may affect the actual performance of any given product. Results are generated with the benefit of hindsight through the retroactive application of certain parameters and assumptions; as a result, Spectrum model theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. This material is being provided for informational or educational purposes only and SIMON Markets LLC does not make any representations that it has taken into account the investment objectives, financial situation, or means of any specific investor. Financial professionals and users of the SIMON Platform, not SIMON Markets LLC, have the sole responsibility for considering whether an investment is suitable for an investor.
In calculating dimension scores, Spectrum does not take into account any riders and/or optional benefits that may be available under an annuity contract.
In determining the client's Target Scores for the Allocation Analysis Tool, SIMON only takes into account the responses that were provided in the investment profile questionnaire by the financial professional, without regard to any particular client’s investment objectives, financial situation, or means. Investment profile results may not be applicable for all investors.
For SIMON's Portfolio Construction Tool, allocations to the Current Hypothetical Portfolio are populated by the financial professional, who selects allocation amounts between equities and bond. Spectrum uses SPDR S&P 500 ETF Trust (“SPY”) as a proxy for equities and iShares Core US Aggregate Bond ETF (“AGG”) as a proxy for bonds and takes into account the reinvestments of dividends. SPY and AGG may not be representative of the equities or bond market as a whole, or any particular equities or bond holdings in your portfolio.
SIMON only provides Spectrum results where SIMON has the necessary historical performance data for the underlier, as provided by a third-party data provider. SIMON considers this third-party data reliable, but does not represent that it is accurate, complete and/or up to date, and it should not be relied on as such.
Spectrum calculates the product's historical negative and positive performance, using the daily closing price of the underlier over the past 15 years from the date of use of the tool. Actual performance may vary significantly from the historical data and such historical data does not take into account the credit risk of the issuer of a given product.
Historical negative and positive performance used in Spectrum analysis does not reflect any separately accrued management fees that are paid at the portfolio level, if applicable.
For the Recalibrated Hypothetical Portfolio in the Allocation Analysis Tool, Spectrum provides a financial professional with a subset of generic structured investments or annuity products to choose to add to the Recalibrated Hypothetical Portfolio. The financial professional is able to allocate up to 30% of the Recalibrated Hypothetical Portfolio to one of the generic products. SIMON makes no representation or guarantee that the Recalibrated Hypothetical Portfolio provides the most optimal Alignment Score. In providing generic structured investment and annuity product choices, SIMON is not recommending a specific security, nor does it recommend investing a certain percentage of a portfolio to one structured investment or one annuity.
For the Portfolio Construction Tool, Spectrum assesses the Recalibrated Hypothetical Portfolio with inclusion of a generic structured investment or annuity product, based on a subset of hypothetical structured investments and annuity products with only certain underliers, which do not reflect the entire universe of structured investments and annuity products that are available or the entire universe of products that could be used in the portfolio. Structured investments and annuity products are made available with many different underliers. Other products and investments may be more suitable for you and may provide the same or greater returns with less risk.
SIMON makes no assurance or guarantee that an Issuer will issue a product with the same product features as the generic structured investment or annuity product choices available in the Recalibrated Hypothetical Portfolio in the Portfolio Construction Tool. The generic structured investment or annuity product terms and features in SIMON Spectrum may differ materially from actual terms or features of any issued product.
For generic structured investments with barrier protection, the European observation takes place on the final determination date. For generic structured investments with a coupon contingency, the coupon contingency observation takes place on the coupon determination date. For generic structured annuities, SIMON assumes equal allocation of premium to a subset of defined crediting strategies, and no rider and/or optional benefits.
Before investing in any product, investors should review the prospectus or other offering documents, which contain important information, including the product’s investment objectives or goals, its strategies for achieving those goals, the principal risks of investing in the product, the product’s fees and expenses, and its past performance.
Spectrum results are for informational purposes only and is not to be construed as a recommendation to buy or sell any security, financial product or instrument, or otherwise to participate in any particular trading strategy.
SIMON Markets LLC operates a technology platform that makes available to financial professionals offerings of structured investments and annuities. In operating this technology platform, SIMON Markets LLC earns revenue based on the volume of transactions that take place in these products and would benefit by an increase in sales for these products.
This material may not, without SIMON’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.
Securities products and services are offered by SIMON Markets LLC, a broker-dealer registered with the SEC, member FINRA/SIPC. Annuities and insurance services are provided by SIMON Annuities and Insurance Services LLC.
SIMON SPECTRUM (“SPECTRUM”) HAS NOT BEEN REVIEWED OR APPROVED BY, AND IS NOT ADOPTED, SPONSORED OR ENDORSED BY, THE ISSUER OF ANY STRUCTURED INSTRUMENT OR FINANCIAL INSTRUMENT THAT IS MADE AVAILABLE ON THE SIMON PLATFORM. SPECTRUM IS FOR EDUCATIONAL PURPOSES ONLY AND IS NOT, AND SHOULD NOT BE VIEWED AS, AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY STRUCTURED INSTRUMENT OR FINANCIAL INSTRUMENT.