Proprietary Products and the Fiduciary-Minded Advisor
When I look back on more than thirty years working with Financial Professionals, I can’t help but be grateful. Experiencing the care and concern exhibited by advisors with their clients has been a true pleasure and the culture of selflessness fostered in this industry is worthy of congratulations. Unfortunately, I have also seen the buy and sell side coming up with new ways to expand their distribution, sales, margin, and profits. These new methods can cause advisors to unwittingly benefit their employer at the expense of their clients.
Many firms claim they have an open architecture, but the truth is it’s only “open” if you play by their rules. Some broker-dealers limit their list of client offerings solely to firms that share revenue, create proprietary products (e.g. mutual funds), give preferred shelf space at conferences, offer additional marketing exposure, or provide higher allocations in investment models. They also create tiered structures for payments which connote how much access one may receive.
“Revenue sharing” is the practice of increasing a mutual fund’s expense ratio with general plan administration, marketing, and other non-investment related fees, passing these expenses on to the shareholders/investors of the fund.
For many firms, the goal was not driving wealth management, but instead creating a sales force to sell more of their preferred or proprietary offerings. Thus, as advisors are looking to offer their clients the best investment line-up, parent companies may be more interested in highlighting their own proprietary product suite or outside fund managers that best feed their bottom line. This was demonstrated when one well-known firm took another’s mutual funds off its client offerings, thereby eliminating the advisors’ ability to sell their low-fee, passively-managed strategies.
Some of the industries’ largest financial institutions have been fined by regulators in the hundreds of millions for such behavior. Firms have continually offered incentives for proprietary offerings in their distribution channel without properly detailing additional expenses, addressing conflicts of interest, or disclosing the amount of top line revenue they stand to gain. This type of collective behavior may be directly contrary to the spirit of the DOL fiduciary ruling. Fiduciaries must evaluate payments to determine if they cause potential conflicts of interest and if clients are protected from these conflicts. If mandatory payments are required to sell in one’s system or a proprietary product gets preferred status, despite potentially being tainted by poor relative performance or high expense ratios, it’s unlikely any fiduciary fundamentals are being met.
When faced with challenges like these, it’s important to reflect and ask ourselves why we got into the business of giving financial advice. We all remember the first time we helped a client reach their financial goals and the look on a client’s face when our advice changed their lives. We’ve all spent countless hours reviewing investments and experienced the thrill of a successful recommendation. We’ve seen clients’ children join and leave the nest, get married, and create their own family. We aren’t just advisors, we are family.
Let’s keep the passion and not let the desire for bigger profits get in the way of doing what’s best for the clients we serve. Look at your book of business and see if you have become an unwilling cog in a firm’s “margin machine”. I encourage you to read your respective firm’s revenue sharing disclosure and analyze the fine print in search of the truth.
If you feel that it’s time to consider a change, we invite a conversation.
Rich DeSalvo COO F3 Logic, LLC | Where Fiduciary Freedom is First
Advisory services are offered through F3 Logic, LLC, a registered investment advisor. Securities offered through Independent Financial Group, LLC, a registered broker dealer. Member FINRA/SIPC. IFG is not affiliated with any of the entities listed. Additional advisory services may be offered by the respective entities listed as permissible by state law.