The article “Relying On Proprietary Products Not Necessarily A Bad Thing For Advisors” was originally published on Financial Post on August 27, 2018.
Jason Heath: If an advisor uses proprietary products they know well already, they can allocate more resources to things like retirement planning.
I have been known to be critical of the biases in Canada’s financial advice industry and rightly so, as there is plenty to criticize. I was interested to read the findings of a recent two-year research investigation by Credo Consulting into the presumably biased practice of proprietary product loading (PPL). The study determined that PPL was common.
“Financial advisors use their own related/affiliated companies’ products far more frequently than could have happened by chance alone,” according to Credo. The results were reported in a study released earlier this year called Advisors Load Clients’ Portfolios With Proprietary Products.
National Bank came out on top, with National Bank Financial advisors recommending National Bank funds to 62 per cent of their clients. The likelihood of a randomly selected investor owning National Bank mutual funds was only 4.8 per cent. A client of National Bank is therefore roughly 13 times as likely to own National Bank products than an average investor.
The largest dealer in the study, Royal Bank, had clients about 5 times as likely to own RBC mutual funds as the general investing population.
Proprietary product loading by dealers of their affiliated manufacturer’s products is common across the board. In fact, all 15 dealers investigated by Credo were found to favour the mutual funds of their sister companies.
These findings do not surprise me. What did surprise me was the degree to which investors’ feelings of financial well-being correlated with owning proprietary funds. I would have expected those with proprietary funds to be worse off than those with more diverse investments. But the investigation found that “the statistical evidence does not support the idea that … investors are any worse off (or better off, for that matter) for having … (proprietary) mutual funds in their portfolios.”
In fairness, the “assessment” of well-being was a subjective one based on survey questions as opposed to an objective one based on relative investment returns, for example. But the results were interesting nonetheless.
I put forth the argument that if the fees for a proprietary product are competitive and represent a fair value for the services provided, I would not be too concerned about the product selection bias that Credo found to exist.
In fact, I might argue that an advisor who spends less time focused on product selection — where they arguably provide less value — and more time focused on tangible items they can control is time better spent in the first place.
So, if an advisor uses proprietary products they know well already, they can allocate more resources to investment risk tolerance assessment, portfolio asset allocation, tax efficiency, decumulation planning, estate strategies, and retirement planning. These, to me, are more black and white than the grey of whether someone owns a National Bank or Royal Bank mutual fund with comparable mandates and fees.
Some low-fee aficionados would decry any suggestion that investors consider mutual funds at all. Given Canada’s high fees, it is a fair concern to raise. The 2017 Morningstar Global Fund Investor Experience Study once found Canada had the highest mutual fund fees of the 25 countries surveyed.
Canada’s median asset-weighted expense ratio for equity funds in the study was 2.23 per cent. By comparison, the other two “bottom” rated countries were Taiwan (1.91 per cent) and Belgium (1.75 per cent). The United States came out on top with median fees of 0.67 per cent for equity funds.
And while Canadians could have significantly lower investment fees by building a do-it-yourself exchange-traded fund portfolio (maybe 0.1-0.2 per cent) or opting for a robo-advisor for investment management (maybe 0.5-0.75 per cent all-in), not everyone is destined to be a DIY investor nor comfortable with the non-traditional model of a fintech firm. Investing is, after all, a personal financial decision, so there is no one-size-fits-all solution.
If you are invested in proprietary products, the two questions I would be asking are if you are invested in products with competitive fees and if you are getting more than just investment management?
If your fees are much more than 1.5 per cent annually, there are definitely lower cost alternatives. And if you are only receiving investment management, with no ancillary services, 1.5 per cent is on the high side. Clearly, based on Morningstar’s recent assessment, most Canadians pay much more than that given the median balanced/allocation fund fee is 2.02 per cent.
Advisors who put their clients in high-fee, proprietary products, and provide little to no additional financial planning are a bad investment. The longer you hold on, the worse your return will be. This is one time that buy and hold is definitely the wrong investment strategy.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.