Investorial



Paying For A Guarantee

MoneySense.ca has a new article introducing Seggregated Funds (aka Seg Funds). Read the article if you want to know what is a Seg Fund. I want to use the article to talk about the age old concept of paying for a guarantee.

I have never been a promotor of Seg Funds. There is certainly a niche that it can fill; a small niche in my opinion. For some people, it is necessary to employ Seg Fund as a strategy due to its creditor protection abilities and their aversion to risk. The argument against Seg Funds has always been the high fees due to the cost of insuring the investment added to the MER of the funds. Usually this cost of insurance is around 0.5% - 0.75%.

But Seg Funds are not the only examples of paying for a guarantee. It’s only an explicit example. Whenever consumers buy CDs (USA) or GICs (Canada). You are in fact paying for a guarantee. Seg Funds take the fees from your explicit gains while CDs/GICs take these “fees” from your implicit gains. You would be naive to think that the financial institutions do not make better use of the term deposits that you give them. They are more than happy to reinvest your money for better gains and give you the guaranteed rate they promised you. Such is the way of the money game.

The article does a good job in exposing certain ridiculous concepts in Seg Funds. Why would I pay for a guarantee in a money market fund or bond fund through a Seg Fund concept? Yet such funds are offered and are being bought by consumers. The sales machine of the financial industry continues to roll on?

P.S. Are there American equivalents of Seg Funds? Please share!

MoneySense.ca: ‘Land of the fee: segregated funds’ by Suzane Abboud

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This entry was posted on Tuesday, October 11th, 2005 at 9:50 am and is filed under Canadian, Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own blog.

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