The pros and cons of segregated funds

Q: My financial adviser strongly recommends that I place one-third of my RRSP with Manulife Retirement Plus. What are the pros and cons?—R.D.B., Montreal

A: There are lots of bells and whistles on the Manulife Retirement Plus segregated funds. Perhaps the most important is the guaranteed lifetime income component. You can choose when and how much income you take, and that income is protected if the stock market takes a hit. If you’re risk averse, for practical or psychological reasons, this is a pro.

The first con is cost. Depending on the fund you choose, the Management Expense Ratio could climb as high as 3.3%, versus the average mutual fund MER of 2.4%. That can make a significant dent in your returns over time. The second con is complexity. The product has three phases in its life cycle, there are income credits you can earn, bonuses tied to interest rates and fees that may apply if you need access to your money.

I’m assuming your financial adviser has your best interests at heart, but I would ask how the commission works. Typically, if you buy a fund with a deferred sales charge (DSC), the adviser earns a one-time commission of 5%. That can sometimes be an incentive to move you from one fund to another even if the current fund is already doing the job.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at [email protected]

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.