A host of guaranteed products are available for clients who simply don’t like risk — guaranteed investment certificates, segregated funds and target-date funds are just a few — but the most prominent one by far is the segregated fund with a guaranteed minimum withdrawal benefit, or GMWB.

Brian Shumack, a certified financial planner in Toronto, has a few risk-averse, pre-retirement clients who, he says, have kissed his feet for introducing them to the GMWB product in the past year.

“The GMWB products are wonderful,” he says, “in the sense that they protect income flow for your client’s lifetime.”

But Shumack offers a word of caution: “They aren’t really guaranteed in some instances.”

In fact, choosing among these various guaranteed products involves serious consideration of the client’s specific needs or caveats. And to generalize about any of the product types is difficult, says Dan Hallett, chartered financial analyst, CFP and president of Dan Hallett & Associates Inc. in Windsor, Ont. But advisors can approach them all with the same philosophy.

“An individual and his or her advisor,” Hallett says, “really has to look at the trade-offs for any particular product.”

Is the lost growth opportunity worth the price? Are the guarantees worth the added costs?

“In the worst-case scenario,” Hallett says, “sure, you get your money back — but there’s also an opportunity cost [vs] if you had invested the cash elsewhere.”

If your client is completely risk-averse, Hallett asks, why not consider fixed-income or GICs available at any bank? In these products, the client gets at least the minimum return, he notes: “If a client is truly ultra-conservative, you’d have a hard time justifying not allocating some money to GICs and bonds. That appeals to the truly conservative investor.”

For clients who are slightly less risk-averse, there are seg funds.

You can parse the seg fund market according to those companies that offer products with lower management fees and those that don’t, says Hallett. The more bells and whistles, in the form of guarantees and resets, the higher the costs. Montreal-based Standard Life Assurance Co. of Canada tends to keep its costs down on its seg fund products, he notes, and, while its investment performance has not shot out the lights, it is solid.

But again, he adds, by losing some of the cost, you’re giving something up. In Standard Life’s case, in certain categories, the product concentrates more on the capital guarantee and less on the death benefit, which keeps insurance costs lower.

And the GMWB options brings additional choices — and costs — to the table. Toronto-based Manulife Financial Corp. introduced a GMWB on its GIF IncomePlus product more than two years ago. Because Manulife poured a lot of money into marketing its GIF IncomePlus product, the entire industry has benefited. As an increasing number of clients have asked about GMWB, insurers have launched their own versions of the product. New product announcements in the seg fund category arrive every month.

Sun Life Financial Inc. introduced its SunWise Elite product a year ago. Industrial Alliance Insurance and Financial Services Inc. of Quebec City followed suit, then Montreal-based Desjardins Financial Security. More recently, Empire Life Insurance Co. , based in Kingston, Ont., launched a new product altogether, its Class Plus, into the category.

GMWB products present a wide range of options. They are available with a minimum initial deposit — $5,000, in the case of some versions of Desjardins’ Helios product — with cheaper fees, starting at $250,000 for Empire Life’s Class Plus.

The benefit period can vary, as well. Starting in the year in which the client retires — usually, at age 65 at the earliest — the plans offer 5%-7% of the deposit back in annual income, with most plans continuing until the client dies. Desjardins, for example, has just extended the withdrawal benefit on its Helios fund to lifetime from its previous guarantee period of 15 years.

As well, a bonus period adds 5% a year to the deposited capital for every year that the client does not take his or her first withdrawal. However, the bonus period varies among manufactures.

Also varied among providers, the step-up option allows the client and his or her advisor to participate in any upside in the equities markets by resetting the capital value of the fund according to the value of equities markets.

@page_break@On the face of it, seg funds with the GMWB don’t guarantee anything more than the equivalent of principal return, but these features allow the client to enjoy some upside without risking capital — a guarantee that attracts retirees and pre-retirees.

“I expect the products are being used a lot in RRSPs by people who are 50-plus, who want to make sure that their retirement savings are there when they retire,” says Jim Gibson, Empire Life’s director of wealth marketing. “I expect we’ll see a lot of GMWB RRIFs in the future, as well.”

Gibson points out GMWB products cover off the major risk — other than equities markets — about which pre-retirees are concerned: that they will outlive their retirement savings. People are living longer and medical expenses are higher, which weighs on people’s minds, he says.

Some advisors don’t like the cost of these GMWB products. The fees are higher for clients who invest their underlying seg funds more heavily in equities, they say.

Other advisors would like to see the product guarantee a return that matched the cost of living, or was indexed to inflation. But such a product feature has yet to arrive.

Shumack, who has been selling more and more of the GMWB product, says there are two types of clients to whom he won’t sell GMWBs — even if they want it.

The first is those clients who can endure risk and who have 10 years or more to invest before they retire. They can invest in a diversified basket of funds.

The second type of client who should avoid GMWBs, according to Shumack, is the one who may need to withdraw more than the 5%-7% annually that the products promise. Any more than that, and the lifetime guarantee doesn’t exist. So, clients need to have another source of income — at least, an emergency fund for unforeseen expenses.

Another recent innovation — this one from the mutual fund industry — involves the addition of a capital return or capital guarantee on the so-called “life cycle” product. These products, which have been around for a few years now, automatically adjust asset allocation, tilting it more conservatively toward fixed-income and away from equities as the client approaches his or her target (retirement) date.

IA Clarington Investments Inc. ’s Target Click product, Mackenzie Financial Corp. ’s Destination product line and BMO Investments Inc. ’s Life Stages are examples. They all work slightly differently but, essentially, an additional fee has been added to provide a capital guarantee.

Hallett’s careful warning about fees and trade-offs also applies here, and he has another consideration. “This is a twist on the life-cycle fund,” Hallett explains, which he doesn’t like.

He argues that asset allocation is just not that simple. He recognizes the appeal of the product, but chances are clients will own six or seven funds or investment vehicles. Tucking another bundle of automatically invested funds into the client’s holdings doesn’t accomplish the sort of nuanced portfolio planning for which advisors and their clients should aim. IE