Q: We have $320,000 in a balanced portfolio in LIRA. Our insurance agent wants us to put this money into segregated funds. I don’t think this is a wise move on our part as we are approaching retirement age. Am I right? And when do distributed funds make sense?
– I understood
AND: You’re right to be skeptical. Few unbiased financial planners would recommend segregated funds under any circumstances. In almost all cases, they only make sense for agents who charge large commissions for selling them.
A ‘ring-fenced fund’ is not actually an investment fund: it is an insurance product. That is why they are often recommended by insurance advisors, who are often not authorized to sell other types of investments. If you only sell hammers, every problem looks like a nail.
Seg funds offer a number of benefits that sound attractive. First, they have a maturity guarantee, which determines the minimum value of the fund after a specified period (often 10 years). In other words, if you invest $320,000 in a 100% guaranteed segment fund, you can be sure that it will be worth at least $320,000 at maturity, even if markets fall.
The funds also have a life insurance component, so if you die and the value of your fund declines, you will receive a payment that will restore you to full health. Moreover, because they are insurance products, seg funds are protected from creditors in the event of bankruptcy. They can also be used to pass assets directly to your beneficiaries after your death, thus avoiding probate fees.
The problem is that these benefits come at an extremely high price: many segmented funds charge fees well over 3% per year. When you consider what you get, it’s just not a good value. Consider the maturity guarantee: the chances of a balanced portfolio showing a significantly negative return after 10 years are very low and not worth insuring. All other benefits of seg funds can also be obtained in other, much cheaper ways.
—Dan BortolottiCFP, CIM, Associate portfolio manager at PWL Capital in Toronto
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