Financial planning firms thought they’d found the pot of gold when they hit on the idea of proprietary products. And, while they may have salvaged the firms’ slumping margins, they’ve also introduced a major stumbling block into the path of their reps.
Independence and objectivity are the cornerstone competitive advantages for independent financial planners. Yet when the financial planning firms began introducing proprietary funds, they may have compromised that.
It’s no mystery why fund dealers are keen on proprietary funds — they aren’t making any money on distribution alone, margins are sliced razor-thin by the fierce competition in the industry and relatively high payouts that reps still command. Fund management is an area in which the firms see plenty of money being made by the independent fund companies, and the dealers have the advantage of a captive sales force.
Winnipeg-based Assante Corp. started the trend when it put together fund manager Loring Ward Investment Counsel Inc. with dealer Equion Group Inc. This led to the creation of the Optima Strategy group of funds. When it acquired Financial Concept Group from Merrill Lynch Canada Inc., it added the Artisan family of funds. Once other firms saw the intelligence of this strategy, many followed suit.
Even the early naysayers, such as Regal Capital Planners Ltd., whose reps reportedly killed a proposed acquisition by Assante in part because they didn’t want to be stuck selling house funds, have now agreed. Regal now belongs to BRM Capital Corp., which is in turn controlled by Cartier LP, which also controls Cartier Mutual Funds.
At a very basic level the mere existence of proprietary products automatically presents a conflict to planners who claim to be independent. Regardless of claims about preserving independence, planners are compromised by having the house funds sitting in their tool box. The fact is: house funds have numerous advantages when it comes to generating sales.
Perhaps their primary advantage is that they are on the product shelf at all. Space on the planners’ shelf has become precious as the number of funds has proliferated. Some of these products wouldn’t draw a second glance if they didn’t belong to the firm — their performance isn’t good enough and the prices are often too high. One Equion rep from the East Coast says, “It’s been a problem over the past two years, I’m not too happy with them. The concept is there but the value isn’t.”
If the value isn’t there with an independent product, reps will just drop it. But that isn’t so easy with a proprietary product. Wholesalers from independent companies have a hard enough time getting the planners’ attention for good, valuable products. Reps say with proprietary funds it doesn’t matter if you’re interested in them or not, they have your attention. Wholesalers of house funds have plenty of access to reps. “There’s no explicit pressure but they would like us to use their products,” says another Equion rep from Toronto.
Waive charges
The house funds also have other subtle inducements. Firms have been known to waive charges such as trustee fees on RRSP accounts for clients who use the house products. But they charge them on the independent funds. Dealer firms would also be able to waive the sorts of routine transaction fees that apply to trades on third-party funds, since they are processing the trade rather than the fund company. All of these small inducements together give proprietary products an edge over traditional funds.
The conflict has been exacerbated by the emergence of reps as shareholders in their firms. Now not only are they induced to push the house funds, but they also have an interest in boosting the company’s share price. The argument is this: advisors get stock in their firms, that stock is priced by a market that values proprietary fund assets at 10 times higher than it values a third-party asset, so it is inherently in the advisors’ interest to put clients into proprietary funds. All things being equal, advisors putting their clients into house funds will implicitly grow the value of their own stock 10 times faster than those who are spreading the assets among any number of independent third-party fund manufacturers.
The firms argue that share ownership is good for morale and helps ensure employees are committed to your vision and focused on building shareholder value. This doesn’t necessarily converge with the interests of clients, however, and it becomes increasingly difficult for reps to resist the pressure. Although many insist they will: “BRM just bought us and they have the Cartier line, but I don’t intend to sell proprietary products,” says an Ontario rep with the recently acquired Balanced Planning Investments Ltd.
Resistance, though, may be futile. At this point the consolidating dealer firms remain relatively autonomous, but they are beginning to introduce their plans to rationalize and impose coherent branding. This makes great business sense, but it could also push reps a little harder toward a head office that may be more focused on the bottom line than the best interests of the clients.
The payoff for the firm in converting assets under administration to assets under management comes not only on the revenue front, it also enhances the firms’ asset retention. Assets that are invested in proprietary products are that much harder to move even when the rep wants to get out of the firm. It may mean punitive redemption charges for clients and more than the usual share of paperwork headaches.
The big beneficiary of proprietary funds is the firm and its shareholders. As firms push to convert assets under administration to assets under management, reps’ credibility is on the line, although they’ll have a hard time resisting.