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 John Yanchus, director of tax and estate planning with Canada Life. We talked about the advantages and challenges of seg funds, and why young investors are getting in on the action. And we started by asking why seg funds seem to be riding high in the current moment.

John Yanchus (JY): There’s two sources or reasons for the demand for segregated funds right now, the first being the ongoing turbulence and uncertainty in global economic markets. Investors are always searching for somewhere safe to shelter their investments, and the guarantee benefit to segregated funds really provides some protection in this time of volatility. A second reason is tax and estate planning goals. The population of individuals over the age of 65 is at an all-time high and benefits — including quick and easy transfers of death benefits to avoid the estate and probate — are at the top of many people’s lists.

Advantages over GICs

JY: A guaranteed investment certificate is a secured investment, generally with a bank. This means that you get back what you invest at the end of your term. And your money is usually locked in for the entirety of that period. A GIC generates only interest income, which is taxed at the top tax rate. In contrast, a segregated fund guarantees your principal at either 75% or 100% level, the choice is yours. They also do not require you to lock in your money for any time period. Segregated funds also allow you to participate in the stock market, which may allow for more growth. In addition, you may also earn different types of income — eligible dividend income and capital gains, which are subject to a lower tax rate or have a lower income inclusion. A segregated fund also has several other benefits, namely estate and probate bypass, privacy, simple tax reporting, and it may give rise to creditor protection.

The intergenerational transfer of wealth

JY: When considering intergenerational wealth transfers, there really are only a couple ways to accomplish this. You can gift assets prior to your death. You can use a will. Or you can use a beneficiary designation. All of these options will require various amounts of planning to make sure that your wishes are carried out as you intend. Segregated funds allow for the death benefit to flow to your designated beneficiaries directly and quickly, and bypass the estate and probate, if required, in as little as five to 12 business days. In contrast, the average length of time to expect a distribution from an estate is at least one year, and this time frame can increase where you have more complex estate matters.

Why younger investors are paying attention

JY: Segregated funds are so versatile these days that there are many different scenarios that seem to make a lot of sense, even when not considering retirement or estate planning. The main situation I think about is for business owners. Often business owners have creditors, and as you are pulling out profits, you want to think about protecting those assets. Segregated funds can provide creditor protection by naming specific beneficiaries from the designated class. Another area would be to protect assets in a multiple-marriage scenario, or to provide assets to children from a previous relationship. Segregated funds allow beneficiaries to be designated that settle outside the estate, so current spouse or other family members won’t have the ability to change designations. The last thing I think of is there are more diverse types of segregated fund options that include a variety of management styles, broader geographic coverage, and multiple asset classes including direct real estate and private credit. For many investors, risk-conscious portfolio construction is critical.

Drawbacks of seg-fund investing

JY: There’s a pre-conceived notion that segregated funds have much higher fees. But this discrepancy between segregated funds and mutual funds has decreased significantly. Fee compression has occurred on all sides of the business. Today, segregated fund fees are close and quite competitive in many scenarios, especially for high-net-worth clients.

And, finally, the opportunity that seg funds represent

JY: This is still a growing market. Personally, I think the value segs bring to the planning side of the business is invaluable. More and more, a segregated fund seems to be the answer in the ever-increasing complexity of the modern world.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to John Yanchus 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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