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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about segregated funds with Paul Ghoche, director of private wealth for Canada Life. We talked about the value of seg funds for estate planning, recent innovations in the seg-fund world, and we started by asking why a segregated fund could be an excellent vehicle for high-net-worth clients.

Paul Ghoche (PG): Yeah. Great question. So, what we have seen in general, within the affluent segment of the population, is that risk-averse clients feel more comfortable investing in the markets once they know that there is a certain level of protection or guarantee provided. We have had clients, who for years have been holding short-term investment instruments, that have eventually agreed to redeploy their money to an investment portfolio but on the condition of a principal guarantee of some sort. Many of the high-net worth clients that we meet have found significant value in the fact that the settlement of their estate would be greatly simplified with a seg-fund offering, that their intended beneficiaries would be spared delays, avoid hefty probate and liquidator fees, and a potential erosion of their investment value. I would say that clients place a very high level of worth on the fact that segregated funds do not flow to the will, and therefore remain private. And this seems to be of particular importance to the affluent, those with minors and / or those who have been divorced. So to give a specific example, we had one large case recently that was a 40-year-old man, engineer, divorced with considerable assets in the bank. He had products like flow-throughs, hedge funds, laddered bonds — more sophisticated products that certainly helped reduce taxation and provide greater diversification. But he also expressed a strong interest in having a sleeve of his overall investments in a seg-fund solution to provide that privacy discussed earlier. He had a young child. Again, had been divorced and felt that the seg-fund assets remaining completely confidential post death, would be worth its weight in gold. Protection towards creditors was also a salient feature he placed significant value on. And we were also able to show him how our proposed portfolio would mitigate some of the headwinds his business was facing at the time, notably with regards to increased transportation costs and the ongoing supply chain delays. So, our proposal incorporated some asset classes that would benefit from these headwinds, and hence provide an offset to his current corporation’s risks. So, in essence, both the attributes found in a seg-fund offering, also having very competitive pricing and a personalized and comprehensive offer enabled us to win the case.

Potential complications

PG: What we see is that estate settlement can not only be quite expensive for those holding larger assets, but we’ve found that, in certain cases, there seems to be more interested parties and hence a greater risk of family discord. Finding an impartial executor of the estate seems to be a common concern as well for those within the affluent segment of the population. Additionally, the substantial reduction of a variety of estate settlement fees, namely probate, executor, or liquidator ones, represents a very tangible advantage in their eyes. Knowing that with a seg-fund offering, post estate settlement, no one will be able to know which son, daughter, nephew, niece, sibling, or even charitable organization received what amount, is also extremely invaluable to many of these high-net-worth individuals.

Estate planning

PG: Definitely estate planning options are a big part of the equation, albeit, you know, I’d say we haven’t seen a huge differentiation between the affluent and non-affluent clients. But no doubt, the numerous estate planning options that seg funds provide are invaluable to many investors, knowing that they could structure the terms of how each of their beneficiaries will get paid is critical. For example, having one sibling, possibly a minor, receive a lifetime annuity, whereas having another child already in adulthood and who is perhaps showing signs of being more responsible and trustworthy, get that lump sum amount rather than an ongoing income stream, certainly gives parents an increased flexibility. What I’d say, as well, is that several affluent clients we have met were also aware of and shared horror stories in terms of potential delays in getting an estate settled, and in some cases, with the final resolution taking several months. And this brings with it not only additional costs but certainly undue stress. So relating to them the speed and efficiency with which segregated funds would be transferred to their intended beneficiaries — typically within seven to 10 business days— certainly resonates strongly with them.

Recent innovations in the seg-fund market

PG: I would say the landscape in the segregated funds in general is constantly evolving. Over the last few years, insurance companies have introduced, for example, an array of fee options: tiered pricing, fee-based options, embedded options with DSC chargebacks… and those have all garnered interest from investors in the past decade or so. Unique or alternative solutions like real assets funds, sustainable solutions, ETFs, even more specific mandates like incorporating crypto and blockchain have virtually become commonplace as well. So the seg-fund guarantee wrapper may, for some, provide these clients with the additional confidence to delve in these asset classes, knowing that there is some risks involved. An additional point I would make is that the increased level of unpredictability in both equities and, more recently, the fixed income markets, has created a greater appetite for some level of certainty that only seg-fund guarantees can provide. Frankly, we are seeing not only greater demand for the death benefit guarantee but even for the reset features, as advisors and clients seem quite keen to have that ability to lock in gains, particularly within equities given the seemingly greater frequency at which financial and geopolitical crises seem to happen. And I’d say certainly, as well, considering the paltry returns that we have seen in the bonds market these past few years, there seems to be an increased appetite or interest in the ability to lock in gains there as well.

Misconceptions about seg funds

PG: I would say there are several misconceptions that would be front and centre — namely that segregated fund fees are significantly higher than that of mutual funds. As I mentioned earlier, the introduction a few years ago of fee-based segregated funds as well as tiered pricing, has definitely bridged the gap between mutual funds and segs. Additionally, the availability of ETF solutions with a seg-fund wrapper is also another arrow in the quiver for those looking to lower the overall cost of a segregated funds portfolio. And, definitely as our population ages — again, keep in mind the bulk of private wealth money in the country is held by clients aged 50 plus — that cost-benefit discussion feels definitely more relevant than ever. Another myth would be that segs are really of interest for older clients. I think that myth is getting more and more debunked. What we are seeing is significant interest from 30- and 40-year-old clients, some of them professionals. And given the broad array of investments that are available, again with that seg-fund wrapper, that can provide high-octane growth while maintaining that level of protection that we spoke about earlier, is something that is driving sales in a variety of age groups. And this makes segs a versatile planning solution, we believe, not only for retirees but also for pre-retirees and younger clients that are perhaps a little more risk conscious. And recent data shows us that affluent clients generally also do not place a particularly high value on more speculative asset classes. A survey taken in Q1 of 2021 — at the height of the risk-on phase of the financial markets — showed that products like SPACs, blockchain, crypto and IPOs had a lower than 25% of level of interest within the high-net-worth segment of the population.

And finally, what’s the bottom line on segregated funds for high-net-worth clients?

PG: What we are seeing in Canada is a renewed appetite for segs in general, specifically with regards to the affluent client space. I would say a few things here. One, pricing has never been more competitive. Many affluent clients we meet feel the incremental fee is a small price to pay with… you know, in order to get peace of mind on many levels. Secondly, many insurers now offer a comprehensive level of private wealth expertise and services. And clients certainly place a lot of value on this as well. And, three, in this uncertain post-pandemic world, and with ever-growing macroeconomic and geopolitical concerns, we have definitely seen an uptick in demand for guarantees. Estates have also grown in complexity, and a seg-fund solution can also help simplify matters for both affluent and non-affluent clients.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Paul Ghoche of Canada Life. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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