By John Drachman
What if your doctor not only prescribed a medication for you but also manufactured and marketed it? You might first wonder, “How objective is her judgment?” With more information and transparency though you might learn that her prescription – a breakthrough formula she developed – indeed was in your best interest.
In the investment world too proprietary products are bought and sold by advisors and firms that must be forthcoming about their roles as both the seller of the product and manufacturer.
Putting Your Interests First
Advisors who sell proprietary products can be fined for conflicts of interest if they keep their own firm’s business relationship a secret. If an advisor only offers proprietary products, you may also be adversely limiting your options by having too little diversification.
Many firms require that you sell your assets before moving to another firm. If the transactions are not optimized for tax efficiency, you could find yourself with a whopping capital gain as well as other expenses and fees you didn’t anticipate.
Proprietary Products: the Upside
As long as your advisor’s relationship as manufacturer is disclosed there can be some very attractive reasons to include proprietary products in a portfolio. Such investments can:
- Play a role in meeting what’s in your “Best Interest.” Ultimately, it’s not who issued or manages the product, but whether it’s the best fit for your investment strategy. A new safeguard, in fact, is coming online this month with the implementation of SEC’s landmark Regulation Best Interest standard which requires broker-dealers to disclose potential conflicts of interest.
- Provide greater diversification advantages. Many firms utilize open architecture platforms that offer third-party products alongside their own. A combination of proprietary and non-proprietary investments can offer an investor an extra measure of diversification. At their best, open architectures can improve the client’s asset allocation strategy, offer lower fees, and potentially provide better returns.
- Help advisors focus on your “bigger picture.” Proprietary products can also help an advisor spend less time focused on product selection and more time on your portfolio allocation strategy for “tax efficiency, estate strategies, and retirement planning,” according to Financial Planner Jason Heath.
Registered Investment Advisors (RIAs) too are increasingly creating their own new product partnerships to offer a growing array of proprietary solutions. Considered to be acting in a fiduciary capacity, RIAs have a distinguished track record for always putting their client’s best interests first.
The Bottom Line
Never hesitate to ask your advisor how much they are going to earn on proprietary sales or whether they would show you similar products from third party firms as well. Or, to paraphrase a question from SEC Chairman Jay Clayton, “How much of my money is going to fees and costs for my proprietary investment – and how much is going to work for me?”
John Drachman is a contributing writer to MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
