When we produced our document, Five questions you should ask your financial representative, we actually had seven questions that we thought were relevant, but it made the piece a pretty long read. Fortunately for readers, we are releasing from our archives the two remaining questions in this blog post. We hope this gives you increased knowledge and confidence to avoid falling victim to potentially dishonest sales practices.
Do I own any investments that are also managed by your company (or an affiliated company)?
Many of the larger financial institutions in Canada separate their investment operations into distinct units: “manufacturing” and “distribution”. Manufacturing is responsible for managing the securities within mutual funds, managed portfolios, or “buy and sell” lists. The employees within the manufacturing division typically do not deal directly with clients of the institution. Manufacturing is often referred to as “head office”. Distribution may consist of multiple sub-units (retail, brokerage, high net worth, etc.) whose purpose is to sell investment products to clients. Employees within the distribution unit typically have titles portrayed to the public such as Financial Representative, Financial Agent, Financial Planner, Financial Advisor, or even Portfolio Manager. Internally, however, these employees are often referred to as “the sales force”.
Whenever an investment product is sold, both a distribution unit and a manufacturing unit will earn some form of compensation. If a distribution unit sells a product that is produced by another company’s manufacturing unit, then it must compensate the other company. So clearly, it is in the best interest of the financial institution to have the distribution unit sell products produced by their own manufacturing unit so that they may retain all of the compensation. This is a potential conflict of interest as the company is motivated to sell what is more profitable to them, and not necessarily what is in the best interest of the client.
Another potential revelation that this information brings to light is that the financial representative that you are dealing with may not be the individual who is determining your actual investments. Financial representatives are often limited in the discretion they have in selecting investments for their clients and are often forced to sell company products or choose from “approved lists” or even outsource the management to someone else inside or outside of their company. The reality is that decisions implemented in your accounts may, in fact, be dictated by “head office” and not your financial representative.
Who owns the company that you work for?
The owners of a company have the ultimate discretion in how the company is operated. Most companies in the investment industry are either for-profit corporations or subsidiaries of for-profit corporations. In the case of subsidiaries, be wary of companies that try to sell you products that are “manufactured” by the parent company for the reasons discussed above.
Large, publicly-traded companies listed on a stock exchange are owned by their shareholders, which may include individual investors, pension funds, or other corporate entities. Senior management of these companies are put under tremendous pressure to “increase shareholder value” which is another way of saying “increase profitability”. While there are many ways to do this, it is often the existing clients of that company who end up providing that source of increased profitability in the form of higher fees, brand new fees or reduced servicing. Executives in these companies that do not deliver increased shareholder value for any given quarter may find themselves out of a job!
In contrast, a more tightly held, or privately-owned company does not necessarily face the same pressures as a publicly traded company. It is possible that a more concentrated ownership structure may provide management with the opportunity to have a longer-term focus or have a more balanced goal of keeping both shareholders and clients happy.
If you have ever been faced with fee increases, new fee charges, or find it challenging dealing with financial representatives that either seem to be too busy or disinterested in servicing you, you may wish to seek out a firm where the owners are not a large, profit-oriented financial institution.
Written by Andrew Kirkland, President at Justwealth