A restorative tattoo artist is not your everyday client, admits Tina Tehranchian, a Richmond Hill, Ont., financial planner with Assante Capital Management Ltd. And that demands a solution that’s not typical, either.

Tehranchian’s client is often hired to work with cosmetic surgeons, camouflaging scars and imperfections resulting from accidents and medical conditions. She’ll work with patients who have scars from severe burns, for example. But patients can get upset if a treatment does not turn out as anticipated and become litigious — presenting a financial risk to the client’s retirement savings and other assets.

Segregated funds have become the RRSP option of choice for the tattoo artist. “It was worth the peace of mind that came with knowing that segregated funds are creditor-proof,” Tehranchian says. “She does something that doesn’t have the desired effect for the client, and there’s a big risk of malpractice or being sued.”

As life insurance products, segregated funds fall under the Insurance Act’s creditor protection. This can benefit clients who are in sole proprietorships, such as the tattoo artist, as well as offer protection to clients in a partnership.

“As long as there is a preferred beneficiary, which is a spouse, child, grandchild or parent, the contract is creditor-protected,” says Tehranchian. “That’s a big plus for some small-business owners, especially if they are at risk of being sued for whatever reason.”

It’s worth noting, however, that over the years, several challenges have been made to creditor protection in the Insurance Act. Advisors should carefully review the limitations and how they apply to specific clients.

In any case, segregated funds may suit the clients’ needs better than mutual funds, despite the fact mutual funds are more flexible and cheaper. Advisors say clients with specific estate-planning goals like the death benefits the products offer. And those clients who don’t want to suffer the volatility of the equity markets can benefit from seg fund guarantees.

In most cases, clients invested in segregated funds pay an extra one percentage point in MER each year relative to comparable mutual funds, and for that reason advisors don’t often recommend them. “You can’t deny they are more expensive,” says Tehranchian, who notes that about 5% of her assets under management are typically in the product, although that is increasing lately.

Similarly, Bill Bell, an advisor with Bell Financial Inc. in Aurora, Ont., uses segregated funds “sparingly in the appropriate situation” for a small part of his client base.

Choosing the product in certain instances is a fundamental know-your-client issue, adds Bell. Although part of his job is to coach nervous investors through turbulent markets, some clients in the end just can’t stomach mutual funds. In those situations, he recommends seg funds.

So, if you think a client will insist on selling into a bear market because he or she can’t sleep at night, segregated funds are the best product choice — for “risk management” reasons, Bell says. He maintains that in these cases the step-up option offered by most segregated funds is ideal. This allows the client to freeze the value of the contract occasionally to protect it from a market downturn. In these cases, the extra 1% clients pay for the product doesn’t cost them, he says, because otherwise they’d be selling at a loss into a bad market.

“If I think I’m going to have a hard time stopping someone from selling at the bottom of a market unless we have this protection in place, [seg funds may be appropriate],” he says. “And most clients will agree to the extra fee.”

Understanding the client is key, and the amount of his or her invested assets as well as time horizon also play a part, Bell says. But as an industry, he adds, “we don’t spend enough time finding out what’s going on in clients’ heads.”

To assess whether clients are candidates for seg funds, he takes them through a self-determination test at www.financialpsychology.com, operated by Florida-based Financial Psychology Corp. and owned by Dr. Kathleen Gurney, a U.S. psychologist.

“If clients have low self-determination scores, they believe they are not in control, that something else is in control,” says Bell. “When the market is down, that feeling of being out of control is overwhelming. It’s not a personality flaw; it’s not a weakness. It’s just a fact. This is how they’re hard-wired to deal with money.”

@page_break@A new seg fund product aimed at clients who fear losing retirement income in weak markets is gaining in popularity. These provide a guaranteed minimum withdrawal benefit, in some cases for the client’s lifetime. “Their share of my book of business has doubled this year,” says Tehranchian, “and I expect demand for them to remain solid going forward.”

At a minimum, these products return investors’ cash to them in 5% annual instalments for at least 20 years. The income guarantee is a feature not offered by mutual funds. “That’s attractive to people who need income, and they’re never going to lose sleep worrying that they’ll run out of money,” she says.

The decision to opt for seg funds also applies to estate planning. As a client ages, he or she becomes more concerned about protecting the estate that he or she plans to pass on to children and grandchildren.

On GMWB products, also called variable annuities, the value of the death benefit is fixed, at the very least, and in some versions of the product, the death benefit grows as the owner ages. “And that makes clients feel like they’re not stealing money from their grandchildren,” says Bell.

As well, death benefits from insurance products don’t pass through clients’ estates after their death. They pass straight to their beneficiaries. IE