Be careful if your advisor suggests investing in segregated funds. These insurance-backed investment products carry high fees and are not suitable for the typical investor. But now their sales are soaring – probably because they are not subject to new fee disclosure rules for mutual funds, ETFs, bonds and stocks that come into effect in July.
“I see this causing some investment firms to be willing to sell seg funds,” says Jason Heath, a certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto.
Data from analytics firm LIMRA confirms this: gross sales of segmented funds in Canada increased 9% year-over-year to $2.49 billion as of September 2015. Segmented funds may seem attractive because they guarantee 75% to 100% of returns capital, but this security comes at the price of 3% fees, making it virtually impossible to beat market returns, let alone most mutual fund returns.
If your advisor recommends seg funds, “ask why they recommend them and how it benefits you,” Heath says. “Then ask him what his next best product suggestion would be.”
