Mutual funds face strong competition from back-to-basics segregated funds

By Susan Yellin | February 24 2015 09:00AM

Managing general agencies (MGAs) say a new variety of stripped-down, lower-cost segregated funds is becoming big competition for the mutual fund industry.“I see ourselves moving into a new era of segregated funds…with companies starting to reintroduce a kind of back-to-basics segregated fund – at least in terms of the features and guarantees and the bells and whistles,” says John Lutrin, executive vice president, wealth management division, Hub International.

The bigger selection of various guarantees and prices should translate into good news for both consumers and life-licensed advisors, says Gary Mandel, president of Independent Financial Concepts Group (IFCG).

After the 2008 market crash, many insurers realized they had taken on too much risk and starting coming up with different types of segregated fund features, first trimming the 100% lifetime guarantees to 10 years, then up to 15 years, then lowering the maturity guarantees to 75%, says Eric Bencherit, IFCG’s director of professional development.

Lower fees

As well, insurers that once offered segregated funds with MERs of 3% or more have dropped the fees by at least 100-150 basis points, mostly because of the reduced benefits in the funds. But Bencherit says segregated funds retain a number of positives that put them ahead of mutual funds.

“[Even though they have] stripped down the cost, they still have a lot of the inherent benefits that a segregated fund offers from an estate planning point of view – passing along assets without probate, privacy for example – and a lot of built-in features that still make it a very strong value for the client. Now that they have lower fees that are competitive with fees that are out there in the mutual fund world it makes a very nice offering in this current market.”

Bencherit says the new segregated funds offer such a breadth of options that some dually licensed advisors have dropped their mutual fund licences, opting instead to sell segregated funds.

Lutrin says about 45% of advisors at HUB are dually licensed, while many on the life licensed side alone have shied away from investment opportunities. But selling segregated funds, he says, is a way for these advisors to increase business with their current clients.

“We are focusing on the traditional life insurance advisor who has always seen himself as [only] a life insurance advisor and now we want to remind them that there is also the investment angle,” says Lutrin.

“Their clients are going to come to them during RRSP season and say: ‘While you have always done my insurance, what about my RRSPs, what about my investments?’ We are giving these people the education they need to know how to do this.”

Lutrin cautions advisors that if they don’t sell segregated funds to their clients, these clients may well look elsewhere, potentially taking their entire portfolios with them. “You are vulnerable to the opportunity you are losing as well as investment options, but you are also vulnerable to losing the relationship to another advisor.”

Lutrin says the role of the MGA is to educate life insurance advisors on investments and the importance of such strategies as diversification and asset allocation. In addition to the general knowledge about segregated funds, Hub is also talking to advisors who sell segregated funds about topics such as asset classes and intrinsic investment management, especially during times of market volatility and a traditional flight to safety. (Hub Capital is the firm’s mutual fund distributor.)

Bencherit says a number of insurance companies are also touting the value of their portfolio managers, especially those who have won awards. In addition, IFCG is educating advisors on more intricate topics like alpha and active share measures. Also being offered are segregated fund portfolios built with ETFs, which help keep fees low, he says. Other companies are offering alternative asset classes like real estate and infrastructure. And, life-income planning products are gaining traction with clients who are looking for investments that can give them income during their lifetimes.

Bencherit says IFCG teaches its advisors to work with clients on a holistic basis so that segregated funds and the investment component are part of their overall financial plan, taking into account topics like insurance planning, risk management and tax efficiency. “Whether it is payout annuities or segregated funds, these are the kinds of strategies that lend themselves to these types of products.”

Lutrin says Hub goes around the country teaching seminars to advisors, talking about which products are most suitable for clients given their particular circumstances, discussing the features of segregated funds and the costs associated with them.

Explain the costs

While segregated funds are currently excluded from the mutual fund industry’s CRM2 disclosure requirements, Lutrin says it’s important for advisors to explain their costs and disclose fees. Regardless of whether a segregated fund is more expensive than a mutual fund, advisors should explain the segregated fund’s value add to clients, including creditor protection and the guarantees.

Advisors who can talk intelligently about segregated funds versus mutual funds will have a better chance of having a meaningful discussion with their clients, he says. In the end, the advisor and client may determine that a mutual fund, rather than a segregated fund, is best suited for the client.

“There is a huge opportunity – an obligation – on the part of the advisor who is life licensed to see themselves as…more than life insurance and living benefits,” says Lutrin. “Clients will look to them as investment advisors as well and they need to be equipped to face those questions from a feature point of view and an investment point of view.”

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