Canada Life SVP unpacks misconceptions around this category, explains how new retirement realities and the great wealth transfer are driving their new relevance
Each month at WP we offer a slate of articles and content pieces that go deep on a particular topic. This December, we’re exploring how segregated funds and annuities fit in advisors' toolkits.
Sometimes in the investment industry, when the ground shifts and macro forces change, the response to new challenges is not to invent a new product set, but to reexamine what’s already on the shelf. As it stands now, advisors are staring down a series of macro changes, from the erosion of pension plan access in retirement portfolios, to the rising role of inflation and market volatility, to the great intergenerational wealth transfer. Amid all these challenges and pressures, Sam Febbraro believes it may be time to unpack some misconceptions around segregated funds.
Febbraro is SVP of Wealth Solutions at Canada Life and President & CEO of Canada Life Investment Management Inc. He outlined some of the common misconceptions that advisors and clients have about seg funds, from issues with fees, to the complexity of their insurance structures. He argues that despite these misconceptions, these products now offer a certain utility well suited to the pressures facing advisors as they manage the retirements and legacies of an aging, affluent, baby boomer generation.
“You have an aging cohort of investors with wealth transfer on their minds, and one of the things they don’t want to do is transfer that wealth in a time where you have market volatility,” Febbraro says. “Canadians need to find ways to create their own pension-like approach, and segregated funds can lend that support through unique protection and estate planning benefits. They’re highly relevant in today’s environment of economic uncertainty and longevity risks. I think Canadians value products that will make them feel more resilient.”
Febbraro highlights three areas of widespread client misconception around these funds. The first is a conflation with mutual funds, which he notes disregards the various insurance features in seg funds, such as guarantees on maturity and death. The second is the idea that these funds are only suitable for the most risk-averse clients. He argues, however, that allocations to seg funds allow for an element of downside protection which offers more space for market participation in the remainder of the portfolio.
The third area where Febbraro sees a common misconception is around fees. While acknowledging that seg funds tend to come with higher fees than mutual funds or ETFs, he notes that there is additional value baked into the structures in the form of their insurance guarantees. He argues that those additional features are worthy additions in the management of risk and estate plans.
“It simplifies estate planning,” Febbraro says. “Money goes directly to beneficiaries and it will bypass some of the expensive and time consuming estate settlement, all while keeping information as private as possible.”
Advisors, Febbraro notes, have their own misconceptions around these funds. He notes that many advisors believe seg funds to be niche products, despite what Abacus research found to be a broadly positive contribution to investor confidence. He notes, too, that many advisors and investors believe these funds to be unnecessarily complex. While the insurance elements of these funds add a degree of complexity, Febbraro believes that the utility of functions like probate bypass and creditor protection as such that advisors need to deepen their familiarity.
Certain clients, Febbraro notes, may find themselves more suitable for seg funds. He argues that business owners, for example, can benefit from creditor protections in seg funds, should they face an unexpected lawsuit of bankruptcy. As well, certain beneficiaries of these funds will be prioritized over creditors should the annuitant pass away. Professionals, too, can benefit from those creditor protections of those professionals are potentially exposed to liability risks. Risk averse investors, too, can benefit from the guarantees in these funds and the peace of mind that offers. For advisors seeking to better understand these products and match them to their clients, Febbraro argues that starting from the fundamentals can benefit.
“The same suitability processes on the investment side are very relevant on the segregated fund side of the business as well, following processes like know your client and know your product,” Febbraro says. “But from there you have to make sure that things like the contract and the guarantees are suitable. You have to look at the maturity and death benefit guarantees and how they align with client goals, and the problem you’re trying to solve within that client’s financial plan. There’s a high degree of satisfaction among segregated fund holders, but that satisfaction is linked to clear communication and advice.”
