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Are Segregated Funds the Best Investment Choice Recommended by Advisors?

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FP Answers: Evaluating the Value of Segregated Funds as an Investment Choice

In response to William's question regarding his adviser's recommendation to move his wife's investments into segregated funds, it is important to consider the features and costs associated with these funds.

Understanding Segregated Funds

Segregated funds offer a combination of features, including professional management, diversification, principal guarantees, and ease of estate planning. However, these features come at a significantly higher cost compared to other investment options, such as traditional mutual funds.

Fee Considerations

Segregated fund fees can range from two percent to four percent, while mutual fund fees typically range from 0.5 percent to 2.5 percent. It is crucial to understand that a portion of these fees, known as trailer fees, is paid to the adviser. This can lead to confusion for consumers when comparing segregated funds to similar mutual fund options.
Guarantees and Benefits
One advantage of segregated funds is the ability to offer guarantees, such as death and maturity value guarantees. These guarantees can provide investors with a sense of security. Additionally, segregated funds allow for the naming of beneficiaries, simplifying estate settlement and potentially avoiding probate and legal fees. They may also offer creditor protection in the event of a lawsuit. While these enhanced features may be appealing, it is essential to weigh them against the higher costs associated with segregated funds compared to alternatives like mutual funds or exchange-traded funds. In conclusion, investors should carefully consider the rationale behind their adviser's recommendation and evaluate the pros and cons of segregated funds. It is important to assess whether the additional guarantees and benefits justify the higher fees. Seeking clarification from the adviser and discussing these points can help make an informed decision.

Impact of Segregated Funds on New Business Ventures

The decision to invest in segregated funds can have significant implications for new businesses. These funds offer a range of features that may be attractive to business owners, such as professional management, diversification, and principal guarantees. However, the higher costs associated with these funds, compared to alternatives like mutual funds or exchange-traded funds, can be a deterrent.

Cost-Benefit Analysis

For a new business, every dollar counts. The fees associated with segregated funds, which can range from two to four percent, may be prohibitive for startups operating on tight budgets. It's crucial for business owners to understand these costs and weigh them against the potential benefits.

Security vs. Cost

The guarantees offered by segregated funds can provide a sense of security, which may be appealing to business owners navigating the uncertainties of a new venture. However, the question remains whether these guarantees justify the higher fees.
Adviser's Role
The role of the adviser is also crucial in this decision-making process. Business owners should carefully consider their adviser's recommendations and seek clarification on any points of confusion. Ultimately, the decision to invest in segregated funds should be based on a thorough evaluation of the pros and cons, taking into account the specific needs and financial situation of the business.
Story First Published at: https://financialpost.com/investing/segregated-funds-best-choice
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