For high net worth families, one of the many pitfalls that is not often discussed when hiring and evaluating a wealth advisor is the use of “proprietary products” in their investment portfolio. The use of proprietary mutual funds is very common in the investment industry. Here is how it works: a family hires a bank or large financial firm to manage their investment assets. Over time, the family begins to see that their portfolio is increasingly full of mutual funds and investments that bear the name of the firm that they hired.
Let’s say that a wealthy family hires ABC Bank and Trust Company as their wealth advisor. The bank initially recommends a diversified mix of stock and bond funds to comprise their investment portfolio, from what they believe to be the best managers in the investment universe. But at the next annual portfolio review, the family suddenly notices that a number of new mutual funds have been added to the portfolio, all managed by ABC bank. When a wealth advisor is recommending the addition of funds managed by their own company, they are selling proprietary products.
What is the issue with proprietary products? Unfortunately, the use of proprietary products creates the potential for non-objective advice. Many advisors are financially incentivized to add proprietary mutual funds to a family’s portfolio. The advisor is likely getting paid more to sell those internal funds.
When hiring a wealth advisor, a family should expect that their wealth advisor is always on the same side of the table as them. In other words, any advice or investment recommendations from the advisor should be expected to be done in good faith—representing what the advisor believes to be the best investment strategies that are available to the client and not influenced by advisor compensation. But when proprietary products come into play, this expectation of good faith may be compromised. When pushing investment products created by their own firm, an advisor may not be recommending what might be the best investment strategy.
At Brown and Company, we have always been independent. More than 30 years ago, Mark Brown made the strategic decision to work with an independent Broker Dealer, LPL Financial. Accordingly, we have never offered proprietary products to our clients. Indeed, LPL Financial does not offer proprietary products. When we make investment recommendations to our clients, our choice of investment managers is objective and straightforward.
If you work with a large financial firm or bank, how many of the individual mutual funds and strategies in your investment portfolio bear the name of your wealth advisor? In some cases, it can be more than half of an investment portfolio. This would be a good reason to re-evaluate your situation and get a second opinion. High net worth families deserve better. The right kind of advice can be valuable, but independence and objectivity should always be the expectation.