Guaranteed returns, lower fees and the financial needs of an aging population are among the reasons for growing interest in segregated funds, says John Yanchus, director of tax and estate planning with Canada Life.
“This is still a growing market,” he said. “More and more, a segregated fund seems to be the answer to the ever-increasing complexity of the modern world.”
Speaking on this week’s episode of the Soundbites podcast, Yanchus said the current economic climate is a key driver of seg fund interest.
“Investors are always searching for somewhere safe to shelter their investments. And at this particular point, the markets certainly lack any component of reliability or stability,” he said. “The guarantee benefits of segregated funds really provide some protection in this time of volatility.”
Segregated funds, once thought to be a high-fee investment, have lately become less expensive — competitive, even, with most other investments in many scenarios, especially for high-net-worth clients.
“Over time, the discrepancy between segregated funds and mutual funds — or even a fee-based stock portfolio — has decreased significantly,” he said. “Fee compression has occurred on all sides of the business.”
And as life expectancy rises, more aging investors are turning to seg funds for their favourable features with regard to estate planning, probate and taxation.
“We are currently experiencing a time where the population of individuals over the age of 65 is at an all-time high,” he said. “There are many people giving their estate plan some serious consideration. Benefits [like] quick and easy transfers of death benefits to avoid the estate and probate are at the top of many people’s lists.”
Yanchus believes there are also compelling reasons for business owners — many of whom have creditors as they start and expand their companies — to consider segregated funds.
“As you are pulling out profits, and removing them from the business structure, you want to think about protecting those assets,” he said. “Segregated funds can provide creditor protection for personal assets invested by naming a specific beneficiary from the designated class. Personally, I think the value segs bring to the planning side of the business is invaluable.”
Yanchus said seg funds have distinct advantages over GICs.
“Segregated funds allow clients to participate in the stock market, which may allow for more growth, and different types of income, like dividend income and capital gains, which are subject to a lower tax rate or have a lower income inclusion,” he said.
Segregated fund options also include a variety of management styles, broad geographic coverage and availability in most major asset classes.
“For many investors, risk-conscious portfolio construction is critical,” he said.
As for end-of-life planning, seg funds have long proven their value, Yanchus said.
“Segregated funds allow for named beneficiaries, which will allow the death benefit to flow to your desired beneficiaries directly and quickly,” he said. “This flow of funds will be paid directly to the beneficiary and bypass the estate and probate, if required, in as little as five to 12 business days.”
In contrast, the average length of time to expect a distribution from an estate is at least a year.
GICs and guaranteed interest options — an insurance-based version of GICs — have long been a staple investment for cautious investors and those preparing for retirement and end of life. But segregated funds are an increasingly popular option.
“The extra benefits you obtain with segregated funds make them even more valuable,” Yanchus said.
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.