Playing defence with your retirement savings usually comes at a price. But it can be well worth it when you look at how a precarious economy can hammer nest eggs.
For many investors, the higher management fees associated with segregated funds – often a full percentage point or more than comparable mutual funds – are a prudent trade-off considering the safety net these funds provide.
Seg funds are classified as an insurance product rather than a financial asset. They offer both creditor and liability protection. Eric Kirzner, the John H. Watson Chair Emeritus in Value Investing at the University of Toronto’s Rotman School of Management, says seg funds make sense for investors looking to lock in the value of their life savings.
“If the maturity guarantee really matters, if you’re a nervous sort, or maybe you’re in ill health and there is a risk you may have to cash in at precisely the wrong time, I can understand why you would do it,” he says.
Unlike mutual funds, seg funds usually come with a maturity guarantee ranging from 10 to 15 years. The guarantee insures a large proportion of the original investment (at least 75 per cent and often 100 per cent), in case a buyer needs to cash out during a down market.
“It is one of those things that, if they ever need it, that will be a huge value,” says Brian Gribben, principal advisor at Brian Gribben Insurance Planning in Ajax, Ont.
Still, he doesn’t put a lot of emphasis on that aspect with clients.
“What I explain to them is that, if by some tragedy they pass away at age 67 and their death benefit guarantee [on their seg funds] is $550,000 and their portfolio is worth $510,000, then the insurance company is going to pay out the $550,000 to their family,” Mr. Gribben says.
“I help them realize that they got to where they are by taking a fair bit of risk and are fortunate to be ahead of the game,” he says.
Seg funds offer an opportunity to lock in the gains people have had so far, in terms of the guarantee, he says. Because of the higher holding cost, Mr. Gribben says a seg fund retirement protection strategy makes sense for higher-net-worth individuals and couples aged 50 or older. It’s not as beneficial for younger people, though.
“If you’re starting a 30-year-old in seg funds, the fee structure over a really long time has a huge impact on a portfolio. But if I have a new client coming to me at age 58 and they have already accumulated most of their capital, then paying a higher fee for some of the benefits [of a seg fund] is not as detrimental to the overall value of their holdings over a certain period of time,” Mr. Gribben says.
Who else can benefit from seg funds when looking toward retirement? If you’re a small business owner, seg funds “make sense to protect your assets,” says Steve Fiorelli, senior vice president of Wealth Solutions for Canada Life.
“Advisors are realizing more and more that in these volatile markets, they can’t be on top of everything. They often spend more time on the financial planning side for their clients and rely more on the experts to help build and manage investment portfolios. Managed solutions through segregated funds gives them the best of both worlds,” Mr. Fiorelli says.
Wayne Mosher, an advisor in Sault Ste. Marie, Ont., says the guarantees and diversity are both appealing.
“In the seg fund market, you can pretty much get almost any type of fund that you can get in the mutual fund market. Global equities, resources, dividend, small cap, large cap, growth – there’s a segregated fund out there that’s going to have that,” says Mr. Mosher. “If I look at two funds and the rate of return is comparable in the long term, a lot of people tend to lean towards a segregated fund.”
Every time markets experience a broad correction, Mr. Fiorelli says investors tend to place greater value on balance and safety in their portfolios, including the comparative safety of seg funds.
“Markets were on a tear for the past six to eight years. But now, just like [during the global financial crisis of] 2008, investors are asking for a more thoughtful approach to where they put their investments,” says Mr. Fiorelli. “That’s why we are seeing this more balanced approach to portfolios and investing really taking hold.”
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