Clients concerned about costs relative to mutual funds should be educated on benefits, says advisor
While segregated fund fees are a key consideration for cost-conscious clients, they shouldn’t be a conversation killer, according to one advisor.
“In the last decade or so, we've gotten into a very fee-sensitive environment,” says Mehul Gandhi, financial planning professional at Westmount Wealth Planning in BC. “Clients and, as a result, advisors and fund companies – whether it's insurance, mutual fund, or ETF companies – are very conscious about fees.”
Explain the cost-benefit
Clients, Gandhi notes, see fees as an important factor in investment selection. Between the introduction of low-cost index funds, the rise of self-directed investing, and a regulatory push for fee disclosure, investors and consumers across Canada are becoming more knowledgeable and demanding transparency on the fees they’re paying for financial products.
When clients see the higher costs of segregated funds compared to mutual funds, it could dissuade them from wanting to invest in seg-fund products. At that point, Gandhi says, an advisor should be able to explain what the client is getting in return.
For clients concerned about a decline in the markets, capital guarantees at maturity and death may add to segregated funds’ appeal. The fact that they can help bypass probate with named beneficiaries, thus avoiding potential fees and complications from the inheritance process, could also be a plus.
“Because of the guarantees involved, of course there’s going to be more fees. You don't get something for nothing,” Gandhi says. “You're essentially getting an insurance contract, and there's going to be a cost to that insurance.”
Seg-fund buyers satisfied, survey suggests
For many Canadians who’ve bought segregated funds, it seems those higher costs are worth it.
In an Abacus poll conducted for the Canadian Life and Health Insurance Association (CLHIA) last year, 82% of Canadians who have experience with segregated funds agreed their fees were comparable to other investments. More than four fifths of those Canadians also said they were satisfied with the products’ ability to provide protection against risk (85%), reasonable return (83%), and reliable income in retirement (83%).
Canada’s segregated fund space has also evolved in many ways over the years. With more diverse options available – including fund-of-fund structures that invest in ETFs, seg funds underpinned by asset-allocation strategies, and others with an ESG component – the new breed of seg funds is gaining appeal among a growing cohort of investors.
“It really comes down to what are the needs of the client?” Gandhi says. “Do they see value in what the seg funds are providing?”
The answer, going by the Abacus research, is “yes.” It found that among seg-fund buyers, 85% were given clear and transparent information about the products. Another 88% said they were sold in a responsible, ethical way, and 92% said they were satisfied with the advice and service they received when they purchased the products.
Ultimately, Gandhi says clients who want to compare segregated funds with other investment products should get advice from someone with the right qualifications.
“They should have an advisor who isn’t only restricted to seg funds, but has the ability to offer various types of products, whether it be mutual funds, ETFs, or index funds,” he says. “Then the advisor should be able to have a more fulsome, unbiased conversation … and really see what’s best suited for the client’s situation.”
Disclaimer: Mehul Gandhi’s comments are solely intended to refer to products sold under a life insurance license.
