LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
A client asks why a deferred sales charge option shows a lower management expense ratio than the fund's front-end option. The agent should explain that:
- Athe deferred option has a lower guarantee level, which is the only reason its fee is lower
- Bthe deferred option carries no cost at all because the insurer absorbs the sales commission
- Cthe deferred option invests in a different and cheaper portfolio of underlying securities
- the charge structure differs, so the client pays on exit instead of through a higher ongoing fee
Correct answer: D) the charge structure differs, so the client pays on exit instead of through a higher ongoing fee
Sales charge options change when and how the client pays, not what the fund holds. A deferred option recovers the cost through a redemption schedule, so the client must plan to stay invested long enough for the schedule to run out.
Why the other options are wrong
- AGuarantee levels are chosen separately and are not tied to the sales charge option.
- BThe cost is recovered from the client on early redemption, not absorbed by the insurer.
- CThe underlying portfolio is the same; only the charge structure differs between options.
Exam tip
Sales charge options change the timing of the cost, not the investments held.
Common mistake
Choosing a deferred option for its lower ongoing fee when the money may be needed early.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
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