Segregated SEG FundsSegregated funds and mutual funds are similar, both are:pooled investments managed by a fund managersold in unitseach having an MERs (management expense ratio) attached to them Save for two important differences:
Both types of funds contain the same kind of holdings. Both can hold:
Both types of funds rise and fall with stock market values. So what’s the difference? Segregated funds come with:
The Maturity Guarantee The standard maturity guarantee (required by regulation) is 75% of your initial investment -- less any withdrawals. You now have 2 options as to the length of the maturity guarantee. The standard 15 year option or you may purchase a shorter 10 year period. You also have the option of increasing the maturity guarantee to 100%. So, what does all this mean?The maturity guarantee works like this:If after 15 years (10 years if you purchased the upgrade option) your account is guaranteed to be worth at least 75% of the original invested amount (less any withdrawals you have made). 100% if you purchased the upgrade option. If at the maturity date (15 or 10 years--which ever you chose) your account is below the guaranteed amount (75% or 100% which ever you chose) the insurance company will top up the account to the guaranteed level. Simple as that. If at the maturity date the account is higher than the guaranteed amount you will receive market value. That’s it! Sound confusing? Let’s look at an example. (This is an actual Segregated fund holder’s account) $100,000 invested in a ‘High Tech Sector’ Seg fund portfolio (with a 10 year 100% guarantee), saw a decline of 65% and fell to $35,000 during the collapse of the 2000 tech bubble. In the next 10 years (2000 to 2010) the fund did recover by 65%, but this only brought bringing the value back to $57,750 -- Formula $35,000 plus a 65% gain = $57,750. Still well below the original $100,000 invested. May 2010 the Seg fund hits its maturity date and the insurance company tops up the account by $42,250 bring it back to original $100,000 value. After 10 years this client recouped all her loses because of the maturity guarantee. Over the years Critics of segregated funds have always maintained the maturity guarantee was useless. After all Mutual funds always more than recovered during any 10 year time-frame. The folks who followed that advice, are today holding high tech sector mutual funds worth considerably less than what they invested 10 years ago and have little hope of ever recovering those losses. The critics of seg funds were not just wrong, but devastatingly wrong. Recent events have proved their arguments costly hot air.
This means ‘Upon death of the annuitant, the named beneficiary will receive 100% of the original invested amount--less any withdrawals--or market value which ever is the greater!’ Guaranteed!! It’s this guarantee that give seg funds such a huge advantage over mutual funds and here’s an example of why. In early September 2001 a 64 year old client in ill health made a purchase of a Seg fund Portfolio of $500,000. We all know what happened on September 11th 2001. During that dark time the portfolio fell--as did the markets--to $350,000 -- quite a loss. The client passed away on September 15th 2001. Had this portfolio been mutual funds the $350,000 value would have been left for his spouse ‘as is’, but because it was Segregated funds--with a named beneficiary--the issuing insurance company topped up the account--by $150,000 and the client’s spouse received the original invested $500,000 -- no mutual fund account could ever do that! Resets The reset feature simply allows you to go back to the beginning and reset your account to day one. It allows you to capture and lock-in a gain. Most seg funds allow 2 resets per calendar year. The best way to explain a reset is through an example. (Actual client account) She invested $100,000 into a Seg fund portfolio with a 10 year 100% guarantee, in December 2008 by March 2010 the account had grown to $143,000 -- an increase of 43%. She reset the account to day one meaning the guaranteed minimum -- 10 years from that day is now $143,000 as is her guaranteed death benefit. This client’s--worst case scenario is $143,000 after 10 years--even if the market collapses. She still gets market value if the account is greater than $143,000. Example -- You invest $100,000 and it grows to $150,000 -- at this point you do a reset, which means the $150,000 is now considered your initial invested amount and the time-frame (10 or 15 years) begins again at day one. Your guaranteed amount is now: $150,000 X 75% = $112,000 (maturity guarantee) $150,000 X 100% = $150,000 (death benefit guarantee) The (15 or 10 year) time-frame is measured from the day of the last reset. Remember you have 2 per year. Sometimes this feature confuses people. A reset only locks in your profit NEVER your money. Your cash is just as assessable in a reset seg fund account as in any mutual fund account and never let a Bank Employee try to tell you different.
MERs are a source of great debate and controversy --especially when talking about Segregated funds. Critics also like to point out that some (very obscure) seg funds have decreasing guarantees as the client gets older -- and this might true -- I personally know of no seg funds that do that. The seg funds I use don’t have this issue, but it would make sense to always ask your advisor about the guarantees attached to any Seg fund offering. They can range from 0.25% to 3.5% and more depending on investment holdings, type of fund and the cost of the fund managers. A fund focused on growth will have different MER than a fund focused on value. A fund with small capitalized company holdings will again be different to a fund holding large capitalized companies. The second issue is the perceived value of the fund manager. Is he or she worth more money because of consistent success? Think of a premiere sports figure--they are paid more money than others on the same team or in the same sports league because of consistent success over time. So too with fund managers the all-stars get the bigger pay check. MERs are an internal fee that is attached to each and every fund product for sale in the market. It is how a fund company pays for its expenses. Again the best way to describe an MER is through example. Suppose the fund information you are looking at -- states the fund has earned an average rate of return of 7.56% for the past 15 years and it has a 2.48 MER attached to it. That means the fund has actually earned and annual average rate of return of (7.56% + 2.48%) = 10.04%. Fund companies, Banks and Insurance companies are required to show your rate of return as a net of the MER. Meaning they have to show you the actual money your account has lost or gained. Banksters will toss out that Seg fund MERs are much higher than equivalent Mutual funds and it is possible that in some cases this can be true. So it is important to understand what the MERs of any given fund are before you buy. High quality Segregated funds have MERs equal to or less than the equivalent Mutual Funds.
“If you were solvent on the day you purchased your seg funds and have a named beneficiary for those funds -- they are creditor proof to all -- except an ex-spouse”. It is true that in Ontario RRSP accounts are now creditor-proof, but any non-registered account is wide open to seizure by creditors including tax authorities. Segregated Funds offer levels of protection that Mutual funds simply cannot provide. Wealth TransferOne of the quickest, simplest and most effective forms of wealth transfer is by using Seg funds.
Example-- You want to leave you account to a grandchild and you are past 80 years of age. Do it like this Name your grandchild the annuitant of the seg fund policy meaning their age is the one used for all the guarantees. You yourself are owner and beneficiary, while your grandchild is the policy’s annuitant and successive owner. While you are alive you completely control all aspects of the account. If your grandchild were to pass away prematurely you as the beneficiary would receive market value or the guaranteed death benefit from the seg fund. If you were to pass away your grandchild receives the account as the successive owner again bypassing probate and estate issues. Age Restrictions SummarySeg Funds Vs. Mutual FundsGuaranteed after 15 years 75% to 100%
Because of the recent economic downturn many independent advisers are actively promoting Seg funds as the superior choice to Mutual funds. You will find many Bank employees targeting Seg funds for negative attack osing (the false) excuse Seg funds come with higher MERs and cost more. As I mentioned previously some older third party Seg funds can have unusually high MERs, but the modern ones and the ones I recommend have MERs equal to or less than the equivalent Mutual funds. Why is is that? The fiduciary duty of any investment advisor is to do: What is in the best interest of the client--period! Banks don not sell Segregated Funds. The can only be sold by licensed insurance professionals The argument that Seg funds cost more is a "red herring" meant to discourage you from going elsewhere to buy a product the Bank cannot supply. Then there is the accusation that Seg funds don’t perform as well as Mutual funds. Nonsense! High quality seg funds have always performed equal to or greater than Mutual funds. Side Bar: One of my clients took her Seg fund portfolio to her Banker for an analysis. His comparison showed the Seg Fund portfolio had vastly out performed the Bank’s Best Mutual funds and finally the Banker did admit that her Seg fund portfolio was the right choice. No one can predict the future -- Gurus who knocked Seg funds as having useless guarantees and being overly expensive -- were wrong, wrong, wrong. Wrong about the market. Wrong about the costs and most of all wrong about the guarantees. Much of their investment advice over the last 20 years--was wrong. Knowing all this--why would anyone choose a Mutual fund when they could have a Seg Fund for the same price?
Return from Segregated Funds to Retirement Savings Accouts 
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232 Return from Segregated SEG Funds to Home Page
Disclaimer The information shown here was gathered from the Study Manual for Applicants for Life Agent’s license, Common Law Provinces 1990 edition, 1998 supplement included. The fees shown here, are only an illustration to depict the impact of any fee charged to the Estate. The fees* charged by Lawyers and Accountants will vary depending on the size and complexity of the Estate to be dispersed. Rates of return on Segregated SEG Funds, in most cases, are not guaranteed and as with any equity type of investment, there is a possibility of market volatility with the funds. Anyone wishing to buy Segregated funds should consult with an Insurance professional, read the provisions of the annuity contract and make sure they fully understand what they are buying.
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