Top advisor says segregated funds increase client comfort and sales

By Al Emid | February 18 2008 02:41PM

In uncertain personal, political or economic times, segregated fund guarantees provide clients with the reassurances of insurance coverage and capital protection. That client comfort in turn leads to increased revenues for the advisor, explains Manfred Merkel, a thirty-year financial services veteran, 25-year qualifying member of the Million Dollar Round Table and president of M. Merkel Insurance & Financial Services Ltd., based in Calgary.

As a proxy for medical coverage, segregated funds guarantees provide reassurance to clients unable to obtain as much conventional insurance coverage as desired, he explains. As well as locked-in growth, the 100% guarantee payable on decease means that the estate gets at least 100% of the original deposit, even if the market is in the midst of a severe downturn at the time. The estate, therefore, has guaranteed funds – possibly more than the original deposit – for expenses that it could not have obtained from an insurance policy payout.

Geopolitical events

The segregated fund guarantees also provide protection from sudden downturns due to unexpected geopolitical events, He says. "We go back to 9-11…the market was in disarray but all the clients we talked to were very calm because they knew about the reinsurance on their funds," he recalls.

In such situations, a deceased person’s estate cannot necessarily ‘ride out’ the downturn, waiting for assets to recover, so the 100% guarantee payable on death means that at least the initial deposit is available to their estates.

The 9-11 attack showed how rapidly the investment environment can change, he recalls. Moreover, Mr. Merkel believes that 9-11 was "only a warning" and that there is more to come in terms of geopolitical unrest. This, he says, is a point that he makes regularly with clients when discussing the segregated fund guarantees.

"We know from 9-11 that nobody expected their funds would go down 40%, 50%. Unfortunately, life doesn’t stand still and people passed away during that time frame and their estates lost big-time."

Subprime crisis

More recently, the subprime crisis has affected some portfolios. "We have another example on our hands right now with the mortgage disaster in the U.S. which has a ripple effect on the markets right now – unexpected events can play havoc with your portfolio." The mortgage subprime crisis played havoc with otherwise stable share prices of American blue chip banks, such as seemingly value-holding financial institutions such as Citibank, Wells Fargo, Regions Financial, Morgan Stanley and others with the trauma continuing at time of writing.

These events show "how fast the market can change because of something you have no control over," indirectly making the case for segregated fund guaranteed investments, Mr. Merkel says. "World events do affect us very quickly in our portfolios," even when not directly connected to the Canadian scene. For him and the clients who accept his proposition, these events make a compelling case for putting part of the client’s total portfolio into segregated funds.

Global markets

Clients easily grasp this logic, Mr. Merkel says because Canadians are more connected to global markets than every previously. "We are now tied into the world and the global market. We are not as sheltered as we used to be," he explains. Many of his clients are well traveled and do not need as much convincing about world uncertainties as previously, he adds.

Many of his clients are also old enough to have experience uncertainty first hand and readily accept his premise.

If they over 50, they went through the 70’s and 80’s when there plenty of problems with the economy and investments, he says. "There have been a couple of waves when people have seen how their money can evaporate in no time – not totally forever, but it can take years to recuperate."

Risk Avoidance

Clients who want to take more risk than Mr. Merkel advises are referred elsewhere, he says. "If they (are not interested in) protected funds, then I recommend them to a stockbroker."

As well as his formal financial training, Mr. Merkel’s own world view looms large in his thinking about protected investments. "From my personal understanding of how the world operates, I am not willing to put my future on the line for some short term gains. It’s not me; it’s not my personality," he says. "I don’t want to go into the high risk investments."

His family history also enters the equation, he says. "One reason why I’m very adamant not to go into high risk only, without the floor, is because I’ve seen many many in the family losing their shirts in 1929, in the thirties, in the forties."

In dealing with a different kind of uncertainty, the confidentiality of the insurance company agreement covering segregated funds, and the fact that they bypass probate on decease of the policyholder, make them ideal for use in discretionary trusts set up for delicate financial tasks, he explains. "If you have somebody you want to have a special amount given to (such as an illegitimate child) or you have a special (political or charitable) interest, you can give money without your estate knowing, (and) channel the money through seg funds to the organization or person’s hands," he explains.

This approach also provides the segregated fund guarantee, as well as confidentiality. Other approaches to funding a discretionary trust, such as use of stocks and bonds, do not provide the same confidentiality, he explains.

"Even during the lifetime, you need the confidentiality aspect…it’s for legacy concerns."

The minimum 100% guarantee also means that on the policyholder’s decease, that at least the original amount is available to finance an annuity where necessary, a provision that the client might also find appropriate for a disabled child or other dependent.

"If you have a disabled child you want to make sure that disabled child has a guarantee, something for their lifetime."

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