LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
Active versus passive management in segregated funds: the trade-off is:
- Active funds seek to outperform at higher cost and may lag; passive funds deliver index returns cheaply
- BNone, since both approaches produce the same return once fees are taken into account
- CPassive funds are always better, since no active manager can beat the index over any period
- DActive funds are guaranteed to win, since professional managers can avoid the worst securities and buy the best ones early
Correct answer: A) Active funds seek to outperform at higher cost and may lag; passive funds deliver index returns cheaply
Both approaches exist within seg fund line-ups. Cost and consistency favour passive for many clients; active may add value in less efficient markets.
Why the other options are wrong
- BThe trade-off in cost and dispersion of outcomes is real.
- CNeither is universally superior.
- DActive management has no guarantee of outperformance.
Exam tip
Active: potential outperformance, higher cost, selection risk. Passive: index return, low cost.
Common mistake
Promising an active fund will beat its index.
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
Timed sets weighted like the exam, and review of every question you miss. Free to start.