When 'proprietary' isn’t a dirty investing word

Financial advisors who favour proprietary products aren’t necessarily a bad investment

When 'proprietary' isn’t a dirty investing word

The Finacial Consumer Agency of Canada announced earlier this year that after an extended review of sales practices in Canadian banks, it concluded that there was no widespread mis-selling of products among the institutions. But that doesn’t mean there’s no bias in product recommendations in the industry, as suggested by a recently released report.

“Financial advisers use their own related/affiliated companies’ products far more frequently than could have happened by chance alone,” said a report from Credo Consulting, which was cited by Toronto-based financial planner Jason Heath in a recent commentary.

According to Heath, National Bank Financial advisors recommended National Bank mutual funds to 62% of their clients, while a randomly selected investor had only a 4.8% chance of owning such funds. “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,” he wrote.

But despite investor advocates’ warnings of conflict and suitability issues, Credo found that investors whose portfolios are loaded with proprietary products don’t feel hurt by the practice. “[S]tatistical 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,”

The findings on investors’ well-being, Heath noted, were only “assessments” based on survey questions rather than comparisons of investment returns. He conceded, however, that the uncovered bias toward proprietary product selection isn’t necessarily harmful to investors.

“[I]f the fees for a proprietary product are competitive and represent a fair value for the services provided, I would not be too concerned,” he said. “I might argue that an adviser who spends less time focused on product selection … and more time focused on tangible items they can control [such as investment risk tolerance assessment, decumulation planning, and estate strategies] is time better spent in the first place.”

Investors in proprietary products costing much more than 1.5% annually, Heath advised, can choose from many lower-cost options. Those charged 1.5% for investment management with no ancillary services are also paying 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,” he wrote. “Advisers who put their clients in high-fee, proprietary products, and provide little to no additional financial planning are a bad investment.”