SUR­VEY

Re­search found that ad­vi­sors are far more likely to choose pro­pri­etary in­vest­ment funds for their clients

Investment Executive - - FRONT PAGE - BY RUDY MEZZETTA

Re­search sug­gests ad­vi­sors are more likely to rec­om­mend pro­pri­etary funds.

cana­di­ans who work with fi­nan­cial ad­vi­sors af­fil­i­ated with firms that of­fer pro­pri­etary mu­tual funds and ETFs are much more likely to own units in that firm’s funds in their port­fo­lios than are ad­vised in­vestors over­all. The former group of in­vestors are loyal to their ad­vi­sors and say they be­lieve they are as much ahead of their fi­nan­cial ex­pec­ta­tions as in­vestors who don’t hold in-house funds in their port­fo­lios.

These find­ings are from the Fi­nan­cial Com­fort Zone Study. The study is an on­go­ing na­tional con­sumer sur­vey con­ducted by Mis­sis­sauga, Ont.-based Credo Con­sult­ing Inc. in part­ner­ship with Mon­treal-based TC Me­dia’s in­vest­ment group. (TC Me­dia pub­lishes In­vest­ment Ex­ec­u­tive.)

A re­port out­lin­ing the sur­vey’s re­cent re­sults states: “When [ad­vi­sors are] faced with hav­ing to de­cide be­tween two al­ter­na­tive in­stru­ments for use in a client port­fo­lio, [when] one is de­liv­ered by an ex­ter­nal, in­de­pen­dent sup­plier and the other is pro­duced by [the ad­vi­sor’s] com­pany, many [ad­vi­sors] are con­tent to opt for the pro­pri­etary prod­uct. Credo’s study con­cludes that ad­vi­sors’ de­ci­sions to [rec­om­mend in­house prod­ucts] do not ad­versely af­fect their clients, gen­er­ally.”

As part of the re­search, Credo asked clients of ad­vi­sors who work at bank-owned bro­ker­ages, mu­tual fund deal­ers or re­tail banks whether the clients in­vest in one of their ad­vi­sor’s firm’s pro­pri­etary in­vest­ment funds. On a con­sis­tent ba­sis, the per­cent­age of clients who said that they in­vest in pro­pri­etary funds of­fered by their ad­vi­sor’s firm was sev­eral times greater than the per­cent­age of ad­vised clients over­all who in­vest in prod­ucts from the same fund man­u­fac­turer.

For ex­am­ple, 52% of clients whose ad­vi­sors work with RBC Do­min­ion Se­cu­ri­ties Inc., Royal Bank of Canada’s (RBC) bro­ker­age arm, said they in­vest in RBC funds. In con­trast, only 11.4% of all clients who work with an ad­vi­sor hold units of RBC funds in their port­fo­lio.

“Credo’s [sur­vey] found that ev­ery dealer that has a re­lated or af­fil­i­ated fund com­pany has its ad­vi­sors us­ing that fund com­pany’s funds in clients’ port­fo­lios to a far greater de­gree than av­er­age,” the re­port states.

Fur­ther­more, Credo’s re­search found that when com­pared by firm, clients who hold units of pro­pri­etary f unds are just as likely to rec­om­mend their ad­vi­sor to a fam­ily mem­ber, friend or col­league as are ad­vised clients over­all. This trend held true when Credo com­pared a firm’s clients who hold units of pro­pri­etary funds to clients of the same firm who don’t in­vest in in-house funds.

“There’s no solid quan­ti­ta­tive ev­i­dence in the data sets we have amassed,” the Credo re­port states, “to suggest that the prac­tice of load­ing clients’ port­fo­lios with pro­pri­etary [funds] com­pro­mises in­vestor loy­alty.”

Sim­i­larly, clients who hold pro­pri­etary funds in their port­fo­lio were just as likely to say they con­sider them­selves to be ahead of their ex­pec­ta­tions for fi­nan­cial well-be­ing rel­a­tive to clients of the same firm who don’t hold pro­pri­etary funds in their port­fo­lio.

The Credo sur­vey’s find­ings are not sur­pris­ing, says Sara Gilbert, f ounder of Mon­tre­al­based St r a t e g i s t Bu s i n e s s De­vel­op­ment: “At the end of the day, the client is not buy­ing a prod­uct. [He or she] is buy­ing the ad­vi­sor and the trust [he or she] has in the ad­vi­sor.”

Of course, the fact ad­vi­sors are rec­om­mend­ing pro­pri­etary funds to the ex­tent they are may raise con­cerns among in­vest­ment in­dus­try crit­ics re­gard­ing con­flicts of in­ter­est — and whether clients’ best in­ter­ests are be­ing served.

“That com­pa­nies have ver­ti­cal in­te­gra­tion, both man­u­fac­tur­ing prod­ucts and of­fer­ing ad­vice, is no sur­prise be­cause it’s a way to main­tain and, in many in­stances, grow mar­ket share,” says John De Goey, port­fo­lio man­ager with In­dus­trial Al­liance Se­cu­ri­ties Inc. in Toronto and a pro­po­nent of ban­ning em­bed­ded com­mis­sions. “The ques­tion is ‘To what ex­tent does an ad­vi­sor, at the mi­cro level, aid and abet that strat­egy by rec­om­mend­ing those prod­ucts to [his or her] clients?’”

How­ever, Credo’s re­search sug­gests ad­vi­sors rec­om­mend pro­pri­etary funds in good faith. Ad­vi­sors rec­om­mend pro­pri­etary funds if they be­lieve these prod­ucts are ap­pro­pri­ate for their clients, the re­port states: “When [ad­vi­sors] find no sub­stan­tial dif­fer­ence be­tween two [in­vest­ment] in­stru­ments, ex­cept that one is pro­duced by their own [firm], they will opt for the pro­pri­etary prod­uct.”

The pos­si­bil­ity also ex­ists that ad­vi­sors rec­om­mend in-house funds out of an affin­ity for the firm with which they’re as­so­ci­ated, says Dan Hal­lett, vice pres­i­dent and prin­ci­pal with HighView Fi­nan­cial Group in Oakville, Ont. This is par­tic­u­larly true, he adds, if ad­vi­sors have the op­por­tu­nity to in­ter­act with port­fo­lio man­agers at their firms’ as­set-man­age­ment arms.

“If there’s greater ac­cess to some of the peo­ple be­hind the scenes, I can see how ad­vi­sors might have a nat­u­ral de­gree of loy­alty to their firms,” Hal­lett says, “even if there isn’t nec­es­sar­ily ad­di­tional com­pen­sa­tion [as­so­ci­ated with an in­house prod­uct] to in­cent them to rec­om­mend those prod­ucts.”

Some clients also may trust prod­ucts bear­ing the brand of their ad­vi­sor’s firm, par­tic­u­larly in the case of the big banks, Hal­lett says: “There’s some com­fort in deal­ing with a large or­ga­ni­za­tion — [a] per­ceived de­gree of safety.”

As well, clients’ rel­a­tive in­dif­fer­ence to the brand of the funds held in their port­fo­lios may be an in­di­ca­tion that clients are more fo­cused on whether they’re on track to meet their fi­nan­cial goals.

“The pro­por­tion of clients who want to get in­volved in what’s in a port­fo­lio ac­tu­ally is quite small,” Gilbert says. “Clients just want to know, ‘Do you have a road map for me to get to where I want to go? [If so, then] OK, let’s go’.”

The on­line Fi­nan­cial Com­fort Zone Study has polled 28,000 Cana­di­ans thus far. The sur­vey is meant to gain in­sights into the re­la­tion­ships among fi­nan­cial ad­vice, fi­nan­cial well-be­ing and over­all life sat­is­fac­tion in Cana­dian so­ci­ety.

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