Study shows Canadian investors in the dark on seg-funds

by David Keelaghan27 Jan 2017
With the RRSP deadline looming, a recent study by RBC Insurance reveals that Canadians are unsure of all their investment options. In particular, using segregated funds in a portfolio is a strategy many investors are oblivious to, says Jean Salvadore, Director of Wealth Insurance, RBC Insurance.
“We were aware there wasn’t a lot of awareness about these products,” she says. “We wanted to do a survey to assess if our gut feeling was correct. When you look at the stats it really jumps out – only 17 per cent are exploring seg-funds as part of the retirement plan.”
The study was carried out in November 2016 when a cross-section of Canadians over the age of 55 and with an annual household income of $100,000 were asked a series of questions regarding seg-funds. Their responses were telling, and largely confirmed RBC Insurance’s suspicion that many investors simply didn’t have a lot of knowledge regarding these products.
Among respondents, 87 per cent stated they wanted an investment product with guarantees on their principal, but also offering growth opportunities. Segregated funds tick both boxes, but 60 per cent of people in the survey were unaware of this factor.
“It is similar to a mutual fund in that you can invest in a range of different asset classes,” says Salvadore. “One of the biggest differences is that segregated funds come with a guarantee on your money at maturity or at death. They also have an ability to lock in gains, so that’s why we promote it as an estate planning vehicle.”
For those nearing retirement and thinking about estate planning, the built-in security that is intrinsic with seg-funds make them an attractive proposition. This is a point the life insurance industry is keen to stress. 
“You can get 100% protection on your investment should you pass away,” says Salvadore. “If you deposited $100,000 in a segregated fund, and should you pass away and the market value is less than that, your beneficiaries will still get the $100,000. It gives people peace of mind when people are planning their estate. Their children or grandchildren will get the maximum of what the market can provide, as well as downside protection so they don’t lose anything.”
The timing of this study is important as currently we are entering a transformative period in the wealth management business. Canada, or the world, has not witnessed such a mass transfer of wealth as will occur over the next decade. It makes having all your finances and assets in order that more important.
“If you look at where the market is going – with the wave of baby boomers retiring over the next 10 years it is forecast that $631 billion of financial wealth is going to be transferred between generations,” says Salvadore. “It’s a huge opportunity, so we want to make sure that Canadians are aware about this vehicle and can connect with an advisor to get more information.”

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  • by Mark 2017-01-27 12:03:54 PM

    Unfortunately, almost all of the companies are pricing themselves out of the market with high MERs but more importantly, useless Maturity Guarantees and restrictive Death Benefit Guarantees and investment options. What was once a product that could be argued was worth the higher MERs because of the guarantees (and also with creditor protection and probate bypass, with a named beneficiary) is now hard to justify to a client and very hard to compete in the current low MER marketplace and illustrations showing the effects of the MERs on long-term returns. Companies now offer a 100% maturity guarantee at age 100 or 105. try explaining that to a client. Death Benefit guarantees are at 75% for Equity products and restricted to Balance and Bond funds to obtain 100% guarantee. Resets of the guarantees, a valuable feature, are non-existent or have been separated out from the MER as an extra charge, but the MER in most cases hasn't decreased. Unless the Insurance Companies revise their products to suit the changing marketplace, what was a very valuable if not well-known investment option will never gain the market share it should have based on client needs.

  • by Brian 2017-01-27 2:35:44 PM

    With the US election still recent it reminds me of the continuous sayings of Donald Trump with the "Crooked Media" in other words lots of incorrect information that someone posts, and others read it and take it for gospel. How unfortunate. I have been licensed for Seg funds and mutual funds for many, many years. I have witnessed the benefits of the seg funds with many clients ranging from a 100% maturity benefit topping off a clients account that was guaranteed to be $80,000 but at maturity was only worth $39,000 meaning the insurance company topped up $41,000 so client was whole. I have paid death claims in a time where the guaranteed death benefit was much higher than the fair market value, including the fair market value had the client bought a mutual fund instead. I have clients that would never have invested in the market except they did because they felt safe having these guarantees only available in a seg fund. Seg funds are far from useless. There are many life companies offering seg funds and most differ with various features and benefits over and above what the government mandate to qualify as a seg fund. For example I deal with one that has resets. And they have many investment options. And the death benefit does not reduce as the client gets older. And the seg funds I talk to clients about has a 100% death and maturity in year 15, not age 105. Read the summary information folder of every companies seg fund offering before incorrect information is spread. And yes, there is a seg fund out there that has a lower MER than it's mutual fund equivalent. Do your own research to find out which fund I am referring to. Do some research to find the real benefits of seg funds rather than come across like "crooked media". And with upcoming CRM2, the company I use most often separates out the extra fee for the seg fund benefits meaning they provide full disclosure. And they do not restrict which funds are available for 100% equity vs having to have a percentage in bonds or fixed income. Start with contacting your local Equitable Life Regional Investment Sales Managers for up to date correct information. And NO, I am not a Regional Investment Sales Manager from Equitable Life

  • by Tapi 2017-01-27 3:24:52 PM

    With all due respect Mark, the one thing I agree with from your statement is the the useless feature of the maturity guarantees. On the other aspects however, I beg to differ. Our company's seg funds actually check all the other boxes which you mentioned as generally lacking: 100% death guarantee of principal from day 1 until age 90, and available to all funds including equity, not just balanced or fixed income, plus death guarantee reset option at every anniversary for 0.11-0.21% extra cost - which in my opinion is worth every penny.
    As of the returns being affected by the higher MERs I can say 2 things: for many people at a certain age it becomes more important to have the guarantees and estate benefits than to chase higher returns. Their wealth is in the "preservation" and not in the "accumulating" phase. Secondly, a properly diversified portfolio of seg funds can actually have higher net after-fees returns than other low-fees portfolios of mutual funds or ETFs. I have seen countless portfolios (from banks of private wealth management firms) overly-diversified in 15-20 different funds and ETFs, but having a highly positive correlation, and they are most often under-performing properly diversified portfolios of similar risk, but having lower correlation, which minimizes the downside potential.
    Bottom line, investment choices have to be individually assessed and catered, and not a "one size fits all" thing. I welcome Ipsos' survey and its findings and I think it is time that our clients need to be made aware of all the options, with all their pros and cons, and then decide together with their advisor what's best suiting their situaton and goals. Unfortunately, right now, the much touted and advertised ETFs and lower-fees mutual funds are the 2 main options made available through the media and our banks' information channels.