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Courting client interest in segregated funds

Spotlighting some of the advantages of this distinctive type of investment. 

Advisors know it makes good business sense to find opportunities to broaden their clients’ awareness of available financial products. Investor bias may lead some clients to believe certain products don’t align with their current financial goals or stage of life. Or if a client lacks financial knowledge or fears the unknown, an advisor’s expertise can provide a bit of education and reassurance. 

Segregated fund contracts are a prime example of an investment option that, while unfamiliar to many investors, could be the best choice for people looking for a combination of market growth potential, estate planning advantages and potential creditor protection. 

What’s different about seg funds?

Among the most compelling features of segregated funds is the ability to provide clients’ named beneficiaries with fast access to their money while sidestepping legal, estate administration and probate fees. This benefit is especially appealing to clients who have an understandable dislike of fees – fees that could consume a portion of their wealth that could otherwise remain part of their estate. Moreover, their estate can be distributed as they desire without the necessity to establish a trust. 

Segregated funds also offer a cost-free annuity settlement option, allowing the owner to specify that the death benefit be used to purchase an annuity that makes periodic payments to beneficiaries. The payments can be issued for a specific period of time (term certain) or over the course of a lifetime (with or without a guarantee). The advantage of this approach is that it offers flexibility in dispensing money to beneficiaries. Funds can be distributed in a measured fashion rather than as a single large sum, helping to lessen the risk of overwhelming a younger person who may be ill-prepared to manage a sudden financial windfall responsibly. 

One of the more often overlooked estate-planning advantages of a segregated fund contract is the ability to avoid probate if a beneficiary has been named. In some provinces, this can also result in maintaining more control over individual privacy.[1] Once a will is submitted for probate, it becomes a matter of public record. Essentially, anyone who pays a nominal fee can see a copy of that will, including the names of people who have been appointed as executors of the estate, people who have expressed interest in being the guardians of affected children, and the beneficiaries of the estate. In a time when maintaining personal privacy has become something of a commodity itself, this aspect of segregated funds is an attractive feature for some people. 

For advisors, segregated funds enable you to stay in the picture, with a cheque in hand, and a helpful in-person opportunity to offer continued asset management services focused on the beneficiaries’ situation and needs. This potential new relationship is preferable to sitting idle while assets wane during the settlement of the estate, and possibly, a decision by the heirs to transfer service representation to a different advisor after the dispersal of funds.

Scenario comparison

Sometimes it’s easier to explain the differences between types of investment funds to clients with the help of simple scenarios, as follows:

After a client dies with $500,000 in mutual funds in a non-registered account that flows through the estate, the money is typically either frozen in its current investments or converted to cash. In either case, there are certain risks, notably, that the estate beneficiaries won’t have control of the funds to use in the way they think is best while the estate is settled. This can take more than a year to complete. In the meantime, the assets are exposed to litigation if the will is challenged and to creditors if the deceased had outstanding debts. There are also additional estate administration costs that may be associated with assets that flow through an estate, including legal, executor, accounting, and probate fees, where applicable.

In a similar scenario, where a client dies with $500,000 in a segregated fund contract in a non-registered account with named beneficiaries, the death benefit does not flow through the client’s estate. If all the paperwork is in order, a cheque from the insurance company can be delivered to your client’s beneficiaries in as little as two weeks. Generally, the assets are protected from the client’s creditors and from estate litigation and are not subject to legal, executor, accounting or probate fees.[2] Advisors will appreciate the opportunity to quickly provide beneficiaries with their inheritance and can immediately focus on recommending ways to steer that money back into the markets.

Helpful digital tools

A wide selection of tools is available to help you do business in a digital world, including Manulife’s Estate Cost Comparison Calculator, which is designed to help illustrate the potential rewards of segregated funds for your clients. As the calculator can show, while initial costs appear higher for segregated funds, money can be saved after the contract owner’s death. The tool is programmed to generate a report that aids clients in the process of choosing the approach that best suits their interests and needs. 

Consider sharing this convenient infographic with your clients to promote the unique opportunities and advantages associated with segregated funds. 

More information about Manulife’s segregated funds lineup is available here. Also, be sure to check out the Advisor Café collection of videos related to estate planning and taxation, here.  

A smart combo – the benefits of ETFs and seg funds together

New from Manulife Investment Management, three investment products that combine the investment and insurance benefits of segregated funds and exchange traded funds (ETF). There are three single asset category Manulife Smart ETF-segregated funds – the first ETF segregated funds of their kind in Canada – currently available in both Manulife GIF Select InvestmentPlus and Manulife Private Investment Pools (MPIP) Segregated Pools. 

Speak to your wholesaler to learn more about these new products, and check out Manulifeim.ca/smart. Earn continuing education credits; register for the new ETF segregated fund course available at Manulife’s Continuing Education Centre. Log in at Manulife.ca/advisors > Sign in > Advisor Portal > Training > CE Centre.

[1] In Saskatchewan, jointly held property and insurance policies with a named beneficiary are included on the application for probate but do not flow through the estate and are not subject to probate fees.

[2] The probate process and fees do not apply in Quebec. There is a verification process for non-notarial wills but not for notarial wills.

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