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Segregated funds explained

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Please note I am not a financial adviser or an insurance broker. This post is for information purpose only. 

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Segregated funds have always been a highly debated product. After years of stagnation, they are making a come-back. In 2015, the total amount of money held in segregated funds in Canada rose by close to 17%.

But, what is a segregated fund?

A segregated fund or -seg- is a product combining both investment and insurance. To sum it up, it works like an “insured mutual fund”. The insurance portion guarantees 75% to 100% of the principal invested. Monies are invested in stocks or bonds.

Segs are considered an insurance product and are usually sold by insurance companies. That’s it for the basics.

what are the advantages?

The main perk of this product is that you are guaranteed to receive the majority of your money back. If the investment portion performs well, you could actually end-up with a lot more money.

The insurance portion also offers a death benefit that is not subject to probate. The money held is also protected from creditors. Should you file for bankruptcy, your seg is off-limit.

what are the DISADVANTAGES?

Segregated funds are very expensive. The management expense ratio -MER-on these products can be easily over 3%. As a reminder, the MER is deducted from the fund’s return.

Your money is also locked-in for 10 or 15 years, depending on the contract. If you decide to cash out before the term, you will be paying a hefty penalty and deferred sales charges. They are very few “no load” segregated funds. “No load” means you are not paying any fees for buying or selling.

Because segregated funds are insurance products, they do not have to comply with the new CRM2 rules on investments. Holders are largely kept in the dark as to the actual costs of their segs.

who are segregated funds for?

They could be of interest for:

  • Self-employed people or small business owners mainly to protect their assets from creditors
  • People who are really, really terrified of market risk and close to retirement
  • People who are in very poor health and at a very high risk of dying soon

final word

To be honest, there aren’t that many people who actually benefit from having segregated funds. Better and cheaper results can usually be achieved by purchasing a separate life insurance policy and investments.

Just like any financial product, you need to do your own research and cost-benefit analysis to see if a segregated fund makes sense for you.

Choosing a Financial Advisor

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Over the last week or so, 3-time Olympian Harold Backer has made headlines here, in British-Columbia, and not for the right reasons. After retiring from rowing, Backer became a Financial Adviser and Mutual Fund representative. He mysteriously disappeared in 2015 amidst allegations of defrauding former clients. He turned himself in last week and has since been charged with two counts of fraud over $ 5 000.

this story illustrates how badly the financial services industry needs to change

The industry is largely unregulated. Anyone can set-up shop and call themselves a Financial Adviser, a Financial Consultant, a Money Coach, a Personal Finances Expert. You do not need any particular qualifications or experience.

Unfortunately, most canadians do not seem to care and are far too trusting

I don’t know which one I find scarier here, to be honest. A lot of personal finances bloggers also call themselves “experts” when they are anything but. This a post for another day.

So, how do you choose a Financial Advisor?

first, look for the following credentials

The Financial Services landscape is full of designations that can be very confusing. Unlike the Accounting profession, there is no talk of “unifying”.

  • Certified Financial Planner®: this is the “Gold standard” of the profession. This designation is international. To obtain it, candidates need to take classes in Financial Planning, pass exams and have a minimum of three years of relevant work experience. In Canada, the CFP® designation is administered by the Financial Planning Standards Council.
  • Personal Financial Planner®: this an alternate designation, administered by the Canadian Securities Institute. It is very similar to the CFP® designation.

A lot of Financial Planners also have one or more of the following specialized designations:

  • Chartered Investment Manager®: a CIM® usually handles and manages portfolios of wealthy clients.
  • Chartered Financial Analyst®: a CFA® also handles and manages portfolios. They also do research and analysis on companies, stocks and other securities.
  • Trust and Estate Professional®: a TEP® is very knowledgeable in estate planning and management, trusts, wills and taxation. Note a TEP® does not replace a lawyer or notary.
  • Chartered Professional Accountant ®: a CPA® prepares and analyses financial records for companies and non-profit organizations. They also do tax returns.
  • Chartered Financial Consultant®: a CH.FC® specializes in retirement planning and wealth accumulation.

The five above designations are very good complements to a CFP® or PFP® designation. However, as stand-alone, they are not enough to provide comprehensive financial planning.

Ignore the LLQP and Mutual fund license

The LLQP is for people who want to sell insurance products. These two credentials do not cut it to provide sound and objective financial advice.

Then, LOOK FOR A FEE-ONLY ADVISER

In my opinion, this is the best way to receive unbiased advice. A fee-only planner will charge you for their time. Some will charge you a percentage based on the total value of your assets.

It will definitely be more expensive than meeting with an adviser at a bank. The main difference is that a fee-only planner will not sell you any products and will put your interests first.

Experience is a bit more relative. Education is key when it comes to choosing a Financial Planner.

 

Consumer proposal explained

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Please note I am not a Trustee in bankruptcy. This post is for information purpose only. 

There is an option to bankruptcy many people have never heard of: consumer proposal.

let’s start by defining a consumer proposal

A consumer proposal is a legal, binding agreement in which you agree to pay a portion of your unsecured debts; your creditors agree to forgive the balance.

This is very different from a bankruptcy, and there are definite advantages to choose a consumer proposal over the latter:

your assets are protected

Unlike a bankruptcy, your house, car and/or savings are not on the line. You can keep them.

you don’t have to make surplus payments

In a consumer proposal, your payment amount is fixed and for five years maximum. You don’t have to make any additional payment and you won’t forfeit your tax refund, if you receive one.

you are protected from your creditors

Your wages can no longer be garnished. Collection agencies can no longer harass you.

Here is how the process works:

a licensed trustee in insolvency works out a payment plan and presents it to your creditors

A consumer proposal is managed by a professional trustee. Payments will go through the trustee.

your creditors have 45 days to accept your proposal

No news means your proposal is accepted. Your creditors can also request a meeting to discuss further. Once the proposal is accepted, you have to adhere to all its conditions and attend two financial counselling sessions.

Most creditors accept consumer proposals. They know it is better for them than you declaring bankruptcy or not paying them.

a consumer proposal does impact your credit score & file

Although, it is “easier” than a bankruptcy, a consumer proposal has the same negative impact on your credit file. You also won’t be able to apply for credit until your proposal is completed. Your existing credit will be cancelled.

if you don’t meet the proposal’s requirements, you will be back to square one

That’s right, your proposal will be annulled and your creditors will come back after you for full payment of what you owe.

you need income to pay for the proposal

This is a mandatory requirement. Consumer proposals are also usually more expensive than a bankruptcy. You also need to pay the Trustee. These people do not work for free.

SECURED DEBT IS NOT INCLUDED

Your mortgage cannot be included in a consumer proposal, as well as any student loan less than 7 years old.

final word

A consumer proposal can definitely be a better option than bankruptcy. But before you decide to go with one, you should always try to pay your debts by yourself or obtain a consolidation loan.

 

Should you ever take a pay cut?

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A reader of the Money Savvy Blog asked when and if it ever made sense to take a pay cut. The surprising answer is yes! There are a few instances when it makes total sense to accept a job offer at a lower salary . Sometimes, there is actually no other option.

You are changing career

If you are moving from Lawyer to Teacher or from Teacher to Mechanic, you can’t expect the same salary, as you probably don’t have any experience in your new chosen field.

you are changing industries or fields

You may still have the same type of job, but if you are moving to an industry you know nothing about, chances are the offer will come with a minor pay cut. Same goes if you move from a technical field to an administrative one, even in the same industry.

you have been out of work for a while

At some point taking the same job with a lower salary makes more sense than remaining unemployed. Unfortunately, the economy has still not fully recovered from the 2008-2009 meltdown. The unemployment rate remains rather high and job prospects scarcer. I get it that salary is important, but if you get too picky, you may have to accept a survival job paying even less!

you need/want more work/life balance or flexibility

If you want to work fewer hours and take more vacation, or work from home, you should expect a cut. Unfortunately, you can’t work 30 hours a week and expect to be paid like you work 100 hours.

you are becoming self-employed

As I previously mentioned here, most of the times your company will not earn money right away. It may also take some time before your clients pay you.

you want to keep your current job

If your employer is having difficulties, you may have to accept a pay cut in order to keep your job.

remember, it is not just the salary

When considering a job offer, also look at the benefits offered such as extended health insurance, bonuses, vacation time, sick days etc…the value of a benefit package can add thousands of dollars to your base salary and save you money.

In my career, I took a pay cut a  few times: when I became self-employed, when I changed careers or when I had to pay for my bills. It did not prevent me from progressing money-wise.

What about you? Have you ever had to take a pay cut?