It’s clearly a measure of the appeal. Most segregated funds with guaranteed minimum withdrawal benefits — a refuge of the well-heeled but risk-averse client — continue to be popular with many investors, despite some significant reductions in the features that GMWBs offer.

The reason they remain popular in these times of value-hunting clients is simple, according to Tina Tehranchian, a certified financial planner and branch manager with Assante Capital Management Ltd. in Richmond Hill, Ont., who considers GMWB products for certain clients who are close to retirement.

“People are scared and we’ve been through the reality of how ugly a market decline can look,” Tehranchian says. Although she is optimistic about the direction of the capital markets over the next five to 10 years, she also remains cautious: “We could have some pretty big bumps along the way.”

Much also depends on clients’ individual situations. She points out that older clients with carefully planned income portfolios cannot afford to liquidate assets to provide income if markets drop again; thus, they continue to want GMWB products.

Other financial advisors report the same kind of interest. Says Mark Coutts, an advisor who runs his own shop, Coutts Financial Services Inc. , under the Sun Life Financial (Canada) Inc. banner in Toronto: “To be honest, I’m selling this product more now than I was before [the downturn].”

Prior to the financial crisis, companies that offer these products were often criticized for charging what appeared to be substantial fees, which often approached 4% of the value of the product. But now, even to former skeptics, these fees are looking justified —- in fact, to many, they appear to be a bargain, given the features that protected many clients from the market mayhem of the past year.

In general, GMWB products achieve their goals by investing the client’s capital in balanced funds. The product is structured to provide the investor with a guaranteed income stream in the future. GMWBs are viewed by some clients as vehicles that provide the same kind of security as a defined-benefit pension plan, an increasingly rare item for many Canadians.

Clients value the fact that companies offering GMWB products remain on the hook for the value of the investors’ portfolios at market highs, prior to any fall in the markets. The only significant mitigating factor for the companies offering GMWB products is that these products do not begin making payouts to the investor for about 15 years, allowing considerable time for the markets to recover. Still, the costs of guaranteeing these elevated values are high, and many companies are passing them on to investors.

The first changes to be made to GMWB products were rolled out by Desjardins Financial Security’s Helios product more than six months ago. Since then, not a single company in the insurance industry that provides GMWBs has spared its clients and advisors the changes.

From a company perspective, the reasoning is clear: GMWB products have proven to be a massive strain, not only on firms’ capital reserves but also on earnings growth. The changes probably reflect a level of actuarial prudence that should have been exercised by the companies offering GMWB products years ago; an advisor might be forgiven for being somewhat skeptical, given some of the spin that accompanies the news about higher fees, reduced benefits and less attractive features.

Typically, such negative news has been paired with other news, such as rollovers to spouses, that can create the impression that something new is being given in return for a benefit that has been taken away.

But, in most cases, the new “benefit” is also an incentive for the insured client to leave his or her capital with the insurer for a longer period of time. This clearly benefits the insurer. Toronto-based Transamerica Life Canadas Five for Life product, which was a late entrant to the GMWB game, now offers clients a 5% bonus for every year, up to the end of their 94th year — essentially, a bonus for life. That’s up significantly from a maximum of 15 years. But the important caveat with all GMWB products is that clients only get the bonus if they have not started withdrawing income.

Leaving the cash invested does make the product more profitable for the insurer, says Geraldo Ferreira, vice president of investment products development and management with Transamerica Canada. From the insurers’ perspective, the most expensive client starts taking income immediately, he notes: “Any manufacturer would say this.”

@page_break@Similarly, Manulife Financial Corp. , the Toronto-based granddaddy of GMWB providers with more than US$110 billion in sales in this type of product through its U.S.-based insurer, John Hancock Financial Services Inc., has introduced a feature on its Canadian IncomePlus GIF that conveniently allows a policyholder to transfer the guaranteed income to a spouse upon the policyholder’s death.

Also convenient, this time for Manulife, is that the death benefit payout is delayed until the surviving spouse dies. Manulife retains the fees, retains the capital longer and doesn’t worry about taking on more capital reserves, which could reduce earnings.

Yet, this is defined as a client benefit, with a fee to match.

Manulife has also eliminated its 100% death benefit on its GMWB offering. And, like most providers, it offers fewer actively managed fund choices for the underlying portfolio and more index funds, which are not only cheaper to provide but also allow Manulife to hedge the equities more efficiently.

Issuing insurers are also limiting the portion of the underlying investments that are exposed to equities. The growth option at Manulife is now 70% equities/30% fixed-income, down from 80/20; the “midgrowth” portfolio has dropped to 55/45 from 60/40.

Sun Life has increased the insurance and guarantee fees on its SunWise Elite Plus in May: the firm also caused a slight revolt when it said that by the end of 2011, clients with 90% equities exposure had to reduce their exposure to 70%, thereby reducing the upside potential for those clients. IE