Segregated funds may traditionally be a bailiwick of insurance companies. But these days, banks are slowly entering the arena, with Bank of Montreal the latest to make a foray.
“Getting into the seg fund business is brand new for us, but this has been in the works for a while now,” Steve Carter, senior vice president for product management and development at BMO Insurance, said in an interview.
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Shortly after BMO acquired the Canadian business of beleaguered insurer American Insurance Group Inc. in 2009, getting into the segregated fund business quickly came on the agenda, says Carter.
Last week, Advisor.ca reported that BMO Insurance will launch Guaranteed Investment Funds, a new lineup of segregated funds. They will be offered through BMO’s in-house financial advisors at BMO Nesbitt Burns and through roughly 6,000 independent financial advisors.
BMO’s Guaranteed Investment Funds will be available December 2 and offer maturity dates of 15 to 25 years, with minimum investments of $500. The deposits are fully guaranteed for at least 15 years, while deposits made during the last 15 years before the maturity date are guaranteed 75%.
The funds invest in North American equity and domestic fixed-income ETFs, money market funds, as well as Canadian or North American companies that focus on income-generating securities.
The maturity benefit guarantees aren’t much different from those of other insurers. But Carter said BMO hopes to compete by combining the 100% maturity guarantee benefit with monthly automatic resets that will enable clients to lock in market gains. That’s achieved by increasing the minimum amount investors will receive at the maturity date.
“That’s a major differentiator,” says Carter, noting how other carriers offer two to three client-initiated resets for up to 15 years before the maturity date, while others offer automatic resets for only once a year.
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Getting into the segregated fund business is a key component to flexing the insurance muscle of BMO’s private client group, which comprises the traditional wealth management and insurance businesses. Insurance has gained earnings clout at that bank’s private client operations, particularly this year.
As of Q3, insurance earnings reached $93 million at BMO, up more than five times from last year’s $18-million insurance income during the same quarter, thanks to changes in long-term interest rates.
Insurance is now 74% of BMO private client business’ $218-million earnings, up from less than 20% in 2012. That’s due in part to after-tax charges that hit insurance income during Q3 2012.
So far, only BMO and RBC manufacture their own segregated funds. RBC launched its own Guaranteed Investment Fund in 2006 and remains a minority player in the business. Toronto Dominion also has Guaranteed Investment Funds, but they closed for new policies in March 2009.
Segregated fund assets in Canada stood at $95.8 billion at the end of September, which reflects a five-year compound annual growth rate of 6.5%, according to Toronto-based Investor Economics’ Insurance Advisory Service.
While the assets have grown over the past several years due to strong markets, the decline in GMWB offerings have hurt sales.
“There’s definitely some additional risk with GMWBs – you have certain guarantees in the notional guaranteed withdrawal balance and then there’s guaranteed income,” says Carter. “We’re not offering that particular product.”
Read: Insurers pare product shelves
It remains to be seen how banks will fare in the segregated fund arena, where they currently have the least amount of penetration. At the moment, the top three players in the business are Manulife, Great-West Life (aggregate of London Life, Great-West Life, Canada Life, Mackenzie and Investors Group segregated fund complexes), and Sun Life.
Dan Hallett, principal at Oakville-based investment counseling firm Highview Financial Group, says the banks might be able to leverage their brands to help get traction into the segregated fund business. However, a key challenge might be their inability to use their standard retail bank to sell the funds.
“The way they dominated in the mutual fund space is by taking the huge distribution [network] they already have and making use of it,” says Hallett. “They don’t have the same leverage in this respect.”
Evelyn Juan is a Toronto-based financial journalist who writes about the wealth management sector. Follow her @evelynjuan on Twitter.