A whole new generation of seg funds have come to the market providing managed portfolio solutions built with lower cost ETFs.Spencer Platt/Getty Images
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Segregated funds are having a moment. More precisely, these investment products with an insurance wrapper have seen rising demand amid increasing market uncertainty and higher inflation.
At the same time, the seg fund market has “evolved” with insurers offering a growing number of innovative products to meet the needs of clients, says Steve Fiorelli, senior vice-president, wealth solutions at Canada Life in Winnipeg, one of the nation’s largest providers of these specialized investment products.
“They have had a bit of a renaissance,” he says.
He points to Canada Life’s recent white paper for advisors, showing seg funds grew from $117-billion in assets under management 2019 to $130-billion by 2021, with gross sales in the first quarter of 2021 reaching $5.4-billion, the highest three-month period of growth over the two-year span.
“In a relatively short period of time, people have realized they need to protect their assets,” Mr. Fiorelli says. “There’s that old adage that it’s not what you make, it’s what you keep, and segregated funds offer that principal protection.”
Those guarantees can include protecting 75 to 100 per cent of invested capital for 10 years or longer, along with periodic resets (i.e. annually) as the funds’ underlying investments increase in value over time.
Seg funds also have traditionally provided a death benefit of 100 per cent. Yet, more recently, many have options such as a lower death benefit of 75 per cent to help reduce management fees, which have been a sore spot for these products, hampering their growth in the past, says Andrew Clarke, certified financial planner (CFP) at Clarke Financial Planning & Insurance Services in Winnipeg.
“Today, there are far more ways to do guarantees,” he says, pointing to one provider, Desjardins Group, even offering inflation protection, which is particularly of interest in today’s climate.
As well, a whole new generation of seg funds have come to the market providing managed portfolio solutions built with lower-cost exchange-traded funds (ETFs).
Still, despite their recent increase in demand, seg funds remain a sliver of the $2.2-trillion of Canadian investment funds, collectively worth about $125-billion as of June 30, the recent Canada Life report reveals. In part, their growth has been limited because only advisors licensed to sell life insurance have access to these products.
‘Tool for certain situations’
Another limiting factor is seg funds are rarely a one-size-fits-all instrument for clients, says Rod Tyler, also a CFP and chartered life underwriter with The Tyler Group Financial Services in Regina.
“I see them more like a specialized tool for certain situations,” he says.
Typically, seg funds’ death guarantees made them popular for clients who want to leave assets to beneficiaries outside the estate, he adds.
The protected capital – minus any withdrawals by the client for retirement income, for example – avoids the probate process, saving thousands of dollars in fees in some provinces where probate fees remain. Mr. Tyler further notes the benefit also gets into the hands of the beneficiary within a few days, providing liquidity, while the estate could remain tied up in probate for several months.
Another benefit is creditor protection for clients who could be vulnerable to lawsuits.
“For me, I am selling these to entrepreneurs,” says Mr. Clarke, noting he advises several professionals who may run small consulting businesses.
Used mostly for sole proprietors, seg funds as insurance products are protected by lawsuits against the client, he adds.
No longer ‘plain vanilla’
Yet, seg funds’ recent growth has been driven by industry innovation and increased demand for capital guarantees with set maturity dates, Mr. Fiorelli of Canada Life says.
“It’s an amazing solution for advisors where they can focus more on financial planning while providing clients with that peace of mind protection along with the growth from a prudently diversified portfolio,” he says.
A decade ago, many seg funds offerings were “plain vanilla” in nature offering exposure to U.S. and Canadian equities, whereas today, these investments offer diversified portfolios that include alternative assets as well as, more recently, ETF-based products.
“You still get that all-in-one managed solution, the seg fund protections, and the cost-efficient structure of ETFs,” he says, noting Canada Life recently launched three ETF portfolios in October. “So, now, you’re getting the best of both worlds.”
Even with these new options, wealth advisors like Diana Orlic, a portfolio manager and investment advisor with Orlic Harding Cooke Wealth Management Group at Richardson Wealth Ltd. in Burlington, Ont., see only limited use for seg funds.
“Where we may consider the use of seg funds is if someone wished to name a beneficiary with complete confidentiality, and separate from the balance of the estate, but [life] insurance can also accomplish that, or gifting during a lifetime,” she says.
Indeed, advisors have alternatives to the desirable characteristics seg funds offer, Mr. Tyler says. But he also notes this class of investments is generally poorly understood among Canadians, who may or may not benefit from having seg funds in their portfolios.
“Sometimes, seg funds are the right solution for certain people, but not others,” he says. “So, often, the best thing I can do is to help clients understand how they work, and then they can decide whether they need them.”
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