# Understanding Segregated Funds



## CuriousReader (Apr 3, 2009)

I am trying to understand segregated funds, I've looked around the forum and read the basics on Google searches but still not clear. 
Would highly appreciate if any of you can give an overview and/or point out a good resource.

In general, is segregated funds a good idea? Or is it just a "scam" that are not for your benefit but rather the bank's / institution's?
If it's a decent idea, what are the ways to go about starting, and maintaining segregated funds?

I am curious as I currently don't have my own life insurance policy.
Not too far in the future I am expecting to be married and not too long, will start a family. I currently have life insurance through my work which (I think) cover 2x annual salary (if this sound outrageous, I might be wrong). I don't have any other life insurance coverage.

The only debt I have is mortgage and I believe it would be comfortably covered without any additional money from insurance (ie. no problem with liquidating my other assets to pay it off and my siblings can easily top up the small amount left, if any).

Thanks!


----------



## MoneyGal (Apr 24, 2009)

Good, basic information on Wikipedia: http://en.wikipedia.org/wiki/Segregated_fund

Seg funds are NOT life insurance although, as you point out, the guarantees *could* be understood as providing some financial security in the event of your death (while the guarantee is in force). 

Why are you considering a seg fund?


----------



## CuriousReader (Apr 3, 2009)

MoneyGal said:


> Why are you considering a seg fund?


Just looking at all available options.
I mean, if it's actually a great product - why not, right?
That's why I am trying to figure out more.


----------



## MoneyGal (Apr 24, 2009)

Uh. What makes you think these are "a great product"? Get a copy of Moshe Milevsky's "Wealth Logic" (may be called "Money Logic" in Canada) from the library and read his analysis of seg funds.


----------



## kcowan (Jul 1, 2010)

Seg funds provide a unique set of guarantees for a specific price. They might make sense if you have specific needs.


----------



## CuriousReader (Apr 3, 2009)

MoneyGal said:


> Uh. What makes you think these are "a great product"? Get a copy of Moshe Milevsky's "Wealth Logic" (may be called "Money Logic" in Canada) from the library and read his analysis of seg funds.


Umm, I didnt think so - I don't know enough about them to decide whether they are great or otherwise - hence I am trying to get more knowledge on it


----------



## PF_Enthusiast (Jan 21, 2011)

Segregated funds are purchased through life insurance companies. They do have their place, but for the vast majority of us, they aren't "a great product". The MER on a seg fund is very high; higher than any mutual fund I've seen. The easiest way I can explain a seg fund is this: it's like purchasing a mutual fund through an insurance company, but, it's insured in a way that you won't lose below 75% (there are different percentages for different funds, but come with a price) of your initial investment. So if you invest $10k in ABC 75/100 seg fund, and the fund tanks to $5k...you get $7500. I guess the most common benefits are they bypass your estate and they're creditor protected...even in most bankrupcy cases. 

I hope this sheds some light and answers what you were looking for.


----------



## indexxx (Oct 31, 2011)

An advantage is the ability to 'lock in' at a given level ad reset that guarantee a few times per year. Various seg funds have different percentage guarantees, but for some people the peace of mind that a guarantee offers is worth the extremely high management fees. So say you bought in at $10,000 worth, and your fund allowed a 100% guarantee (many offer only 75%). So say the fund grows to $12,500 eight months later, at which time you decide to reset the guarantee at that level. So now, even if the market crashes and your fund drops by 50%, you are still sitting at $12,500 because you have a guarantee. But of course this service is not free- the fees are really high, higher than mutual funds and far more than index funds. Those additional MER percentages can eat up half your potential gains over time. But as I say, for some people the benefit of the guarantee is worth it.


----------



## PF_Enthusiast (Jan 21, 2011)

I should have added, the 75 or 100% guarantee that indexxx and myself were referring to is if you hold the fund until maturity (usually 10 years) or if you were to die while you're holding the fund. The "reset option" is great, but comes at a price. I can't remember, but it seems to me there are limited times you're allowed to reset. I'm sure another member can answer that...


----------



## indexxx (Oct 31, 2011)

PF_Enthusiast said:


> I should have added, the 75 or 100% guarantee that indexxx and myself were referring to is if you hold the fund until maturity (usually 10 years) or if you were to die while you're holding the fund. The "reset option" is great, but comes at a price. I can't remember, but it seems to me there are limited times you're allowed to reset. I'm sure another member can answer that...


Yes, it depends on the fund- up to four times per year is the maximum any fund allows if I remember correctly.


----------



## gibor365 (Apr 1, 2011)

imho seg funds just stealing your money.... for mentioned 10 years , you'll pay only in MER 25-30%, that equal or more than 75% "guarantee". Seg funds are trying not to invest into products with high beta (I've never seen for example precious metals seg fund), but I saw seg money markets and index funds with a huge MERs.... on my work I have exposure to seg funds companies and they make huge money on small investors and all their billable projects - "steal" more money from them.


----------



## Potato (Apr 3, 2009)

One other thing to keep in mind: insurance companies got hammered by their seg funds in 2008/2009. Not looking to see a repeat, a seg fund sold today is likely to be a worse deal than one sold 5 years ago.


----------



## MoneyGal (Apr 24, 2009)

Well, that whole market got revolutionized in 2006 or so when the first seg funds with income guarantees were introduced. And then it is undergoing another wave of changes now, as the guarantees are rolled back. I'm not sure anyone is really selling "plain vanilla" seg funds any more.


----------



## HaroldCrump (Jun 10, 2009)

What is the problem we are trying to solve here?
Is it one of insurance to protect future family members?
Or is it tax minimization? Current or future?

Depending on the problem in question, the solution could be different.

Just based on the first post and without any further information, I'd say the poster needs term life insurance and nothing more.


----------



## Toronto.gal (Jan 8, 2010)

*Gibor:* barux hashav. :biggrin:


----------



## gibor365 (Apr 1, 2011)

Toronto.gal said:


> *Gibor:* barux hashav. :biggrin:


Sliha gal, I don't understand your ivrit (2nd word)


----------



## kcowan (Jul 1, 2010)

HaroldCrump said:


> Just based on the first post and without any further information, I'd say the poster needs term life insurance and nothing more.


OP needs to stop talking to insurance salemen, mascarading as investment advisors.


----------



## Echo (Apr 1, 2011)

Segregated funds would appeal to:

- people who are self-employed, or have a professional corporation, or are at risk of declaring bankruptcy, as their assets are protected.
- people approaching retirement who need equity returns but don’t like the risk and want to be well protected with the security of a guarantee.
- someone who thinks the odds are high that they will die within the next decade.

So, probably not you. 

Not a great idea for most people - http://www.boomerandecho.com/segregated-funds/


----------



## HaroldCrump (Jun 10, 2009)

Echo said:


> - people who are self-employed, or have a professional corporation, or are at risk of declaring bankruptcy, as their assets are protected.


If a person is facing imminent bankruptcy, where will he/she get the money for contributing towards the high insurance premiums?



> - people approaching retirement who need equity returns but don’t like the risk and want to be well protected with the security of a guarantee.


But you won't get equity returns after the fees are factored in.
You will get, more or less, GIC returns, perhaps a point or two above.
Unless you somehow manage to time your investment magically by buying in during a particularly down market (like 2008 - 2009) and reset your base during a market top (like 2000).



> - someone who thinks the odds are high that they will die within the next decade.


Why would the insurance company not know that information as well, and factor that into the premiums?
And if you know something they don't, why not just get a whackload of term insurance.


----------



## gibor365 (Apr 1, 2011)

HaroldCrump said:


> But you won't get equity returns after the fees are factored in.
> You will get, more or less, GIC returns, perhaps a point or two above.
> Unless you somehow manage to time your investment magically by buying in during a particularly down market (like 2008 - 2009) and reset your base during a market top (like 2000).



I don't think you can buy seg fund with more than 75% return guarantee and it's not simple to find if during 10 years period index dropped more than 25%.... and just in MERs you will pay 25-30% in 10 years, so IMHO who doesn't want take a risk, GIC is much better option.
and if you can manage to time your any index ETF by buying in during a particularly down market (like 2008 - 2009) and sell during a market top (like 2000). -> your return will be much higher...but key word here "magically"


----------



## indexxx (Oct 31, 2011)

gibor said:


> I don't think you can buy seg fund with more than 75% return guarantee and it's not simple to find if during 10 years period index dropped more than 25%.... and just in MERs you will pay 25-30% in 10 years, so IMHO who doesn't want take a risk, GIC is much better option.
> and if you can manage to time your any index ETF by buying in during a particularly down market (like 2008 - 2009) and sell during a market top (like 2000). -> your return will be much higher...but key word here "magically"


There are still some segs with 100% guarantee. I did some 'training' at an insurance company last year and a couple of their segs offered a 100% option. I ended up deciding not to go ahead with the job though; I could not in good personal conscience present the vast majority of insurance products and their associated 'investments' to people. My friend got stung by one of these charlatans- a supposed 'friend' of 15 years who is now a "Financial Advisor!!" with a large insurance company. He basically hosed her and many more of his friends, coercing them to leverage huge amounts into things that tanked.


----------



## gibor365 (Apr 1, 2011)

Can you give example of fund with 100% maturity guarantee? (link)
I just did such search in google and coudn't find any open fund with 100% maturity guarantee.....

btw, a lttle that 100% guarantee (usually 100% + o.5% annually) are Protected linked notes that usually mature in 3-5 years....however, upside is also limited


----------



## indexxx (Oct 31, 2011)

gibor said:


> Can you give example of fund with 100% maturity guarantee? (link)
> I just did such search in google and coudn't find any open fund with 100% maturity guarantee.....
> 
> btw, a lttle that 100% guarantee (usually 100% + o.5% annually) are Protected linked notes that usually mature in 3-5 years....however, upside is also limited


http://www.hughestrustco.com/media/segregated_funds_with_100_guarantee.html
http://www.empire.ca/consumer/investments/our-products/segregated-funds/en/
http://www.mackenziefinancial.com/en/pub/funds/seg.shtml
http://donnellyadvisors.com/investments/segregatedfunds

If I remember correctly, the company I was looking at working for (Inslink) had the Mackenzie funds.


----------



## gibor365 (Apr 1, 2011)

indexxx said:


> http://www.hughestrustco.com/media/segregated_funds_with_100_guarantee.html
> http://www.empire.ca/consumer/investments/our-products/segregated-funds/en/
> http://www.mackenziefinancial.com/en/pub/funds/seg.shtml
> http://donnellyadvisors.com/investments/segregatedfunds
> ...


When I was searching, I found exactly those links , but I'd like to see not this "propoganda", but real fund ticker so I can do research on it in globeinvestor or morningstar.....


----------



## MoneyGal (Apr 24, 2009)

Summary of the academic research on how much the embedded guarantee of the seg fund should cost: https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20040625/RFUNDSEGMN25

Quotes from the article: 

Fortunately, someone has done the research on exactly how much the insurance part of a seg fund should cost. Moshe Milevsky, a finance professor at York University's Schulich School of Business, crunched the numbers using statistical models developed for options and determined that a fair price for a 10-year guarantee on an equity growth fund is an extra 0.45 percentage points in fees, or $45 a year on a $10,000 investment. Any more and you're probably getting ripped off; any less and you're getting a good deal.

For funds that hold bonds, the guarantee is worth a lot less, naturally, since the odds that a portfolio of bonds will lose money over 10 years is much lower than for stocks. An investor should pay no more than $13 extra per year on that $10,000 investment for a balanced fund, Mr. Milevsky says, and just $2 (or 0.02 percentage points) for a pure bond fund.

By his measures, many Canadian investors are paying much more than they should. Take the AIC Advantage Segregated Fund II, a guaranteed version of the popular mutual fund of the same name. The fund's holdings are exactly the same, but with a 100-per-cent guarantee, the cost rises to 5.79 per cent from 2.69 per cent. That extra bit of security costs more than $310 a year on $10,000, almost seven times Mr. Milevsky's "fair value."

[if you want to download the academic research I can point you to it, and it will provide the analytic framework for doing the same analysis]


----------

