Segregated Fund - should I get it?

Question

My advisor is trying to sell me Segregated Fund / investment loan, in summary, it is something like this:

1. Canada Life (through National Bank) will lend me 100K to invest
2. The annual interest is 2.7% - that is $2700 per year for me to pay to Canada Life
3. I can only invest in mutual funds provided by Canada Life. (see list here)
4. As you can see, the MER is around 3% - 3.5%, higher than normal MF.
5. The principal of the investment loan is guaranteed, that means if I lost 50% of the principal. Canada Life will pay 25% and I am responsible for the remaining.
6. My advisor is a friend of mine ( of course :) ), she also owns the similar product from another financial institution and has made pretty good return since 2019.
7. The annual $2700 interest paid is tax deductible.

I am in my 40's and not new to investment. I have steady income and in my investment accounts I only hold low cost index funds and some active MF's I bought long time ago. I don't need this 100K loan to generate any investment income for me for awhile, probably not needed for 10 years. Our salary is enough to maintain our current life style.

I am fully aware I need to pay the loan interest and the 3% MER which is high. The reasons I am interested are,

1, I believe in long run (10+ years). The US stock market will continue to rise and the MF's I choose can continue to grow at annual rate of 6% to 13%.

2. I don't have 100K to invest and someone is lending me that much to do so.

3. The annual $2700 loan interest is tax deductible.

4. My advisor has it herself.

5. The underlying MF are managed by reputable fund companies like AGF.

Is there anything I miss? Is Segregated Fund / investment loan worth it? Thanks

Answer 1

In the US, mortgage rates are so low that there are those who ask, "Would you recommend that people take out a new loan to invest?" I typically respond "it depends" and actually lean towards a "no". [Again, to emphasize - if your question were simply "should I take out a 10 year fixed loan to invest in the market?" many conservative members here would simply answer 'no'. All the other details? "NO!"]

In your case, the term drops to 10, lowering the chance of success. A backtest of 1999-2009 data would show a clear bad decision. But, that's not what bothers me. The 2.7% is an ok number, about what I'd expect. "3.0%-3.5%" annual expense? That is criminal. Morally. Not legally. It's a 1/3 haircut on your final result. If my $100K grows to $200K over this time, you get $143K (I used 3.3%/yr expense). The bank made more than you, and got paid their interest on top of this.

(I did not address the pseudo-guarantee. It's nearly worthless. Even our lost decade of the 2000s was close enough to break-even that the 30%+ cost of this is far greater than the risk they claim to cover)

Friends/Family and finance are a tough mix. In this case, your friend isn't doing you any favors.