Financial Advisors and Proprietary Products

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When you go to a financial advisor, you are typically in the market for either financial planning advice, help investing your portfolio, or some combination of the two. Investment products are often essential to that transaction.

Clients may want their advisor to provide recommendations on specific vehicles, or even actively manage their accounts. Even customers looking for strictly fee-for-service guidance may need an advisor who can broker a transaction or give them access to products that serve their new retirement strategy. These products might include insurance, mutual funds, separately managed accounts, or actively managed exchange-traded funds.

Proprietary products are investment vehicles issued by the same financial institution that is advising the client. In other words, your advisor is both the seller and manufacturer. It would be like if you went to the doctor, and he not only prescribed and sold you the medication, he made and packaged it himself.

 A financial advisory firm who sells their own investment products may seem like a clear conflict of interest. Yet there are legitimate reasons for advisors to offer their own creations, other than for the additional revenue. Rather than limit themselves to ready-made products from other institutions, firms with a proprietary offering have more control over what they suggest to their clients. They may also design and sell products that will better fit the needs of their customers. Meanwhile, they are distinguishing themselves from other advisory firms that do not provide custom solutions.

In theory, it’s great when the person you go to for advice can say, “I have just the right resolution for your problem.” However, real life advisors may be affected by conflicts of interest. In addition to your asset management business, the financial advisory firm stands to collect management and other fees associated with the proprietary product. The company may be motivated to steer more assets into those products and funds where they collect twice—often unbeknownst to the client.

Even financial advisors with the best intentions may be subject to unconscious bias. For example, mutual fund trustees for retirement accounts have a fiduciary duty to act in their clients’ best interests. Yet there is evidence that many of them unjustifiably favor house-brand funds in the portfolios of 401(k) plans they manage.

As if implicit biases were not enough, some advisory firms reward employees for pushing the company’s products. Although the Financial Industry Regulatory Authority forbids incentivizing the sale of proprietary products, the practice still exists. And it isn’t just the large banks with hefty product portfolios and the capital to absorb outsized penalties. Advisory firms are regularly fined millions for insufficiently guarding against conflicts of interest.

If you are working with a financial advisor who is promoting proprietary products, ask if the institution also sells third-party funds. The consultant may be required by their employer to push the company’s products first, even if there are better options available. If your advisor only offers proprietary products, you may be limiting your options by building out your assets with them. By restricting diversification, your portfolio will be less equipped to mitigate risk.

Before purchasing proprietary products, find out what will happen to the asset if you move your account away from the institution that issued it. Some proprietary investments are not portable, and you may be required to sell them before swapping firms. This could result in a capital gain/loss, as well as transaction fees or other expenses. The associated costs and tax implications could make it cost-prohibitive for you to switch advisors—again, limiting your options.

While proprietary products are not necessarily a red flag for an advisory firm, it’s important to educate yourself on potential conflicts of interest, and any terms surrounding your asset. At the end of the day, it’s not who issued or manages the product, but whether it is the best fit for your investment strategy.


bill stavros