Companies like Sun Life, Great-West Life and Manulife are in the business of selling life insurance. Another key life-company product is annuities, which provide guaranteed retirement incomes until one dies, usually as an alternative to a RRIF. Life policies and annuities provide excellent solutions to specific needs.  But when an agent suggests segregated funds; proceed with caution.

Beware of expensive segregated funds

The segregated fund, might not be a good solution for your needs. This is essentially a mutual fund with a capital guarantee. Between 75% and 100% (depending on the class of fund) of your investment capital is protected when units are sold and/or upon your death. This capital protection doesn’t come cheap. In some cases, you may be paying 3% or more in annual management fees.

Takeaway 1: You don’t need a guarantee which eats most of your return.

Fee disclosure is crucial

Unfortunately, seg-funds are not subject to the same regulations (CRM2) as mutual funds and other managed securities accounts. Life-co agents are overseen by provincial insurance regulators or the federal Superintendent of Financial Institutions (for federally chartered life insurers). Licensed investment advisors and mutual fund brokers are regulated by provincial securities commissions, which, through new CRM2 requirements, have forced investment dealers to produce statements with improved reporting of performance and fees.

Takeaway 2: Seg-fund investors will not have any new fee disclosure on their statements.

Life industry balking at improved disclosure

While the life companies and their distributors say they are in favor of improved product-information disclosure, they are reluctant to take action because they argue that too much information may confuse and not be useful to clients. They also support the continuation of embedded fees. Life-co agents won’t be impacted by a client-best-interest rule, if and when one is created.

Takeaway 3: If you own seg-funds, insist your advisor disclose and explain all fees.

Ask your agent how they are compensated from the products they are recommending. Dealing with life-cos and their products can be beneficial, but remember to ask the right questions.