Segregated funds, which often are criticized by investors because of their relatively high fees, are seeing new-found popularity just as fees in the wealth management business are increasingly coming under the microscope.
Regulatory changes coming in July, 2016, will shed fresh light on mutual fund fees and performance. But these changes – known as the second phase of the client relationship model, or CRM2 – do not require financial advisers to include increased disclosures on fees or product performance on segregated funds. The same holds true for bank products such as index-linked notes, principal-protected notes and guaranteed investment certificates.
"I would've thought that a common standard across all investment products that are offered to the end investor would be the common goal, so there would be consistency within the market and not product arbitrage," says Gordon Forrester, executive vice-president, product and marketing and head of retail at AGF Investments Inc.
Some industry observers suggest this could be swaying financial advisers who hold both insurance and mutual fund licences into favouring segregated funds over mutual funds.
"I have been hearing about advisers dropping investment licences, mainly mutual funds, to focus on segregated funds," says Dan Hallett, vice-president and principal with HighView Financial Group. "By doing this they escape CRM2 and all Canadian Securities Administrators initiatives for that matter."
Segregated funds are similar to mutual fund investments with a built-in insurance contract. Policy holders are given a guarantee on a portion of their principal investment, while at the same time being able to invest their dollars into an investment portfolio made up of underlying mutual funds.
Overall net assets in segregated funds have reached $113.1-billion as of March, 2015, compared with $104.3-billion the previous March, according to an Insurance Advisory Service report by Investor Economics.
As well, the $243-million in segregated funds net sales in March, 2015, (compared with $144.1-million in March, 2014) was the highest monthly tally dating back to February, 2012, according to a recent report by Desjardins Securities.
The increase in segregated fund sales could continue to creep upwards also because investors may be seeking stability in their portfolios. According to a recent Sun Life poll, 98 per cent of Canadians feel it is important to have some form of guaranteed income during their retirement years.
Like many insurance products, one of the major benefits of a segregated fund is the guarantee it provides investors. At the maturity date, or upon death, the money an investor puts into the fund is guaranteed to be paid out to an annuitant or a beneficiary (usually 75 per cent or 100 per cent of money deposited, depending on the policy).
Certain contracts, such as guaranteed minimum withdrawal benefits, include a guaranteed annual bonus, which could add an additional 3 to 5 per cent to the principal as long as an investor does not withdraw any funds from the contracts.
But the downside for some investors is in the price tag.
Due to the insurance contract element, management-expense ratios can be an additional 50 to 150 basis points on top of the cost of a mutual fund. (The average mutual fund MER is approximately 2.4 per cent.)
Despite the insurance industry not being included in CRM2, the overall pressure on fees has some insurance companies taking note.
Last month, Empire Life Insurance Co. launched a new 75/75 lower-cost option for investors, which provides a 75 per cent maturity guarantee and 75 per cent death benefit.
"The demand and desire for a solution that was lower cost was definitely something we were hearing from the marketplace," says Julie Yoshikuni, vice-president of retail investment products for Empire Life.
Several other life insurance companies have made enhancements or added to their segregated funds lineup.
Sun Life Financial announced a new lineup of segregated funds called the Sun GIF Solutions. The new funds are the first in-house manufactured segregated product for the life insurance company, which first offered segregated funds through a partnership with CI Financial in 2001. That partnership has since ended, and Sun Life took the opportunity to gain full ownership over its segregated-fund family.
BMO Insurance, which entered the segregated-fund business in 2013, made several enhancements to its lineup last fall including a new death guarantee reset option. For an additional 10 to 15 basis points, market gains can be locked into the principal guarantee every three years.
BMO also expanded its segregated-fund account types to include locked-in registered savings and income plans, as well as a tax-free savings account, while last year Standard Life Canada added 13 new segregated funds, bringing its total offering to 50 funds.