Advisors Load Clients’ Portfolios With Proprietary Products

Question: So What?

Credo has concluded a two year research investigation into the subject of financial advisors loading their clients’ investment portfolios with their affiliated companies’ financial products (a.k.a. Proprietary Product Loading or PPL.)  What Credo found, in short, is that investors who work with advisors who are associated with a dealership that also has a product manufacturing division are many times more likely than other advised investors to have that company’s products in their portfolios.

This has long been the suspicion of many critics of Canada’s current advice industry. Some suggest that this practice puts investors at a distinct disadvantage because of the possibility that advisors who have no affiliation with a manufacturer are more objective and will ensure that their clients’ moneys are invested in “best for the client” portfolios of products rather than a “best for the advisor” portfolios.  The results of our study reject this assertion, however.

Credo’s three part study first established that client portfolio loading is indeed a reality.  If it were not a reality, the study would have ended at that point.  But, because Credo found extensive evidence that PPL is a standard industry practice, we proceeded to assess whether or not the practice has resulted in adverse effects on clients.  Further, we explored whether or not the practice has an influence on the relationship between the client and their advisor.  The conclusion of the study is that, despite clear evidence of proprietary product loading (PPL), investors are not adversely affected by this practice. Further, investors who are subjected to PPL are no less likely to recommend their advisors to others than investors who are not involved in PPL.

Credo’s extensive qualitative discussions with advisors who both practice and avoid PPL leads us to the conclusion that advisors do generally have their clients best interests at heart; they do their best to integrate products into client portfolios that they deem best in class.  And, though it is true that, when faced with having to decide between two alternative instruments  for use in a client portfolio where one is delivered by an external, independent supplier and the other is produced by their own company, many are content to opt for the proprietary instrument.  Credo’s study concludes that advisors’ decisions to go down this road do not adversely affect their clients, generally.  

Getting Into The Details

As a part of our ongoing Financial Comfort Zone (FCZ) Study, Credo conducted an extensive survey of investors asking them questions related to their personal financial circumstances.  This included questions about investors’ use of financial advisors, their use of various investment fund companies and their financial situation and condition.  The questions were posed in an order that made it inapparent that the researchers would look for specific relationships between the dimensions that were considered in the analysis we describe below.

The Finding of Proprietary Product Loading (PPL)

Basic cross tabulations between two of Credo’s questions revealed the reality that financial advisors use their own related/affiliated companies products far more frequently than could have happened by chance alone.  The table below shows that it is very common for the client of an advisor who is affiliated with a given dealer to be significantly more likely than average to have that dealer’s sister company’s investment funds in their client’s portfolio.

Exhibit 1.  PPL in clients portfolios by Canadian advisors

Exhibit 1 above shows that a client whose advisor is affiliated with National Bank has a 62% probability of having National Bank funds in their portfolio (i.e., Client Usage) while the probability of a randomly selected investor having National Bank funds in their portfolio is only 4.8%.  A National Bank advised investor is almost 13-times more likely than average to have National Bank funds in their portfolio.  

Similarly, there is an 11.4% probability that any randomly selected advised investor has RBC Mutual funds in their portfolio.  By contrast, there is a 52% probability that a client of an RBC DS advisor or an RBC bank-based advisor will have RBC Mutual funds in their portfolio.  So, an investor is more than four times as likely to have RBC Mutual Funds in their portfolio if they are advised by RBC.

In short, Credo found that every dealership that has a related/affiliated fund company has its advisors using that fund company’s products in clients portfolios to a far greater degree than average.  For that matter, we also found the manifestation of a number of well-known marketing agreements and alliances in the PPL.  For instance, AGF’s long standing relationship with Primerica has resulted in 37.8% penetration of AGF product in the portfolios of Primerica advised investors; this is more than 7 times the level of penetration of AGF products in the average advised investor’s portfolio.  

So… Is PPL a Problem?

This situation creates the justifiable concern that financial advisors might be using proprietary instruments to a greater degree than they should and in ways that might be detrimental to the investor.  Credo set out to explore this matter and to determine whether or not this was a real issue.

Are Investors Worse off Because of PPL?

To explore the effect of PPL on investor well-being, Credo asked investors about their feelings of financial well-being; “i.e., how they currently feel with respect to their financial expectations.”  We asked them to indicate if they currently feel:

  1. Far behind their expectations (a.k.a. Far behind)
  2. Behind their expectations (a.k.a. Behind)
  3. About where they expected to be (a.k.a. At Par)
  4. Ahead of their expectations (a.k.a. Ahead)
  5. Well ahead of their expectations (a.k.a. Well ahead)

However correct it might be, Credo used this question as a proxy measure for investors feelings of financial well-being. With this assumption, the result of this question enabled Credo to study and compare what we refer to as the financial expectation or “well-being distributions” for many subsets of the investor population.

For instance, we were able to study the circumstances of BMO NB clients and establish that they generally feel significantly better off than other Canadian investors. In the graphical analysis  below (Exhibit 2) we see that a full 8% of BMO NB investors feel Well ahead of their financial expectations and an additional 26% feel Ahead of their expectations. Only 5% feel Far behind their expectations and only an additional 14% feel Behind their expectations. Comparing the financial expectation distribution for BMO NB clients (i.e., the bottom “bar” in Exhibit 2) with investors who are not BMO NB clients is a relatively simple exercise both visually with Exhibit 2 and with some very basic statistical testing.  

Exhibit 2. An example of a distribution of investor well-being

Credo determined with greater than 95% confidence that these two distributions are statistically different (what seems obvious on visual review) and that this difference likely didn’t happen by chance alone.  From this, we can reasonably infer that BMO NB investors are generally in a better place — from a well-being perspective — than other Canadian investors.  

Part 3: Does Using Proprietary Product Harm Investors?

A similar comparative analysis can be conducted to assess whether or not there is a difference between BMO NB clients who do use BMO funds and BMO NB clients who don’t use BMO funds.  In a comparative test between the two, our “null hypothesis” is that there should be no difference between these two conditions (i.e., that they either do or don’t use BMO funds.)  This null hypothesis is equivalent to saying that a BMO NB client is neither better nor worse off for having BMO funds in their portfolio.

What did we find?  There was not enough statistical evidence to reject the null hypothesis.  Essentially, the statistical evidence does not support the idea that BMO NB investors are any worse off (or better off, for that matter) for having BMO mutual funds in their portfolios.

Credo conducted the same analytic exercise for all of the dealerships for which we had evidence of PPL.  In only a few exceptional cases were we able to reject the null hypothesis and say that in fact there is a difference in the condition of investors who were loaded with proprietary product. But the difference was likely not the difference critics of PPL would have predicted.

Bank-advised Investors Show Remarkable Circumstances

In the case of three banks — TD, BMO and RBC — Credo found a significant difference between the well-being distributions of clients who were using their company’s proprietary funds and those who were not.  But, whereas critics of PPL suggest that PPL is likely to put an investor at a disadvantage, in each bank’s case the well-being of investors who were loaded with their advisor’s company’s product were significantly more favourable than the well-being distributions of the investors who were not using the bank’s mutual funds.  

Upon reflection, Credo infers that bank-branch based advisors who are able to convince their clients to become part of a savings regimen that involves their banks mutual funds actually create value for their clients by driving them in a positive direction on the financial expectations continuum. By contrast, bank advised investors who opt against their banks investment products are left to their own devices and are less likely than others to achieve a more desirable state.  


How PPL Affects Investor Loyalty to Advisors

In numerous focus groups where Credo has investigated advisors use of various suppliers financial instruments we have learned that some advisors are highly averse to using the investment instruments that are produced by their dealers’ sister companies.  These advisors indicate that they feel it is somehow improper to do so claiming that it has the potential to make them seem that they are not impartial in their clients eyes.  These advisors are concerned that they might compromise their clients’ loyalty if they were to load the client’s portfolio with their own proprietary products.  

A substantially larger proportion of advisors we have spoken with indicate that they take all reasonable means to evaluate similar instruments. When they find no substantial difference between two instruments except that one is produced by the company with which they share a common brand, they will then opt for their own company’s proprietary product.

“I’ve already put my faith in this company by hanging my own name with its banner… why should I be embarrassed to use the products it produces.  Haven’t I already shown the level of faith I have in them?”

Accordingly, Credo took a further step and used the same quantitative analytic approach to to determine whether or not PPL as a business practice affects an investor’s willingness to recommend their advisor to others — investor loyalty.  It could reasonably be hypothesized that PPL might to some degree compromise an investor’s perspective on their advisor and thus their loyalty.  Clearly, some investors are affected by these practices:

“My investment advisor keeps suggesting that I should put my money in savings instruments that are managed by the company he’s working for.  I’m sick of it… I’m leaving him and I’m sure not going to recommend him to other people I know.”

To investigate this quantitatively, Credo used data from another question for this analysis.  We asked investors to indicate on a scale from 0 to 10 (where zero indicated absolutely not and ten indicated absolutely yes) whether or not they would recommend their advisor to others. We categorized the data we collected  into four categories:

  1. Advocates were investors who scored their advisor a 9 or a 10
  2. Proponents were investors who scored their advisor a 7 or an 8
  3. Stasis investors scored their advisor a 5 or a 6; while
  4. Switch Zone investors scored their advisor less than a 5 out of 10.

As is shown in the graphical analysis below (Exhibit 3,) 19% of investors are advocates for their advisor.  At the opposite end of the spectrum about 16% of investors are in the area we characterize as the switch zone — where they score their advisor below a 5 on a ten point scale.

Exhibit 3. Investor Loyalty to Their Advisors

A similar distribution was produced for advisors from each of the dealerships that has an affiliated investment product manufacturing arm. Each of these was further partitioned for the purpose of comparative analysis; we looked at the loyalty effect on RBC DS advisors of PPL by comparing the distribution we found for RBC DS clients who don’t use RBC funds with RBC DS clients who do use RBC funds.  

Credo again found insufficient evidence to suggest that investor loyalty to their advisors is affected by the practice of PPL.  Credo conducted the same analysis for the other dealerships and found similar results.  Other than anecdotal comments and the very well expressed concerns of critics, there is no solid quantitative evidence in the datasets we have amassed over the last two years to suggest that the practice of loading clients’ portfolios with proprietary products compromises either investor well-being or the investor’s loyalty.  



Credo believes that this research offers considerable evidence that Canada’s financial advisors take honest steps to ensure that the investment products they recommend to clients are the best possible recommendations they might make.  Despite clear evidence that proprietary product loading is a systemic reality, there is simply a lack of evidence that this diminishes investors well-being.  This indicates that advisors generally take appropriate care to ensure that their recommendations to clients take account of their clients’ best interests first and foremost.  This, of course, is in the advisor’s own best interest; it helps optimize client loyalty.  

Real, deep and valuable client relationships represent an advisor’s personal investments in a long-term business. The idea that an advisor might undermine these investments in favour of some misguided willingness to support their corporate brand’s interest in market penetration seems both absurd and short-sighted.  This is not to suggest, however, that advisors are not motivated to support the brands to which they have sworn some degree of allegiance.  The evidence from this study, however, makes it plain that the practice of PPL doe not currently harm investors’ stated of well-being and their resulting loyalty to their advisors.  That doesn’t mean it’s not a good idea to keep an eye on the matter though, does it?!

Ask the Analyst

Credo regularly presents a variety of analyses that will interest students of the Canadian wealth management industry.  Some may be perfectly on point for you.  Some may touch on a subject that is a tangent to a matter that is of interest to you.  If you have a question that you feel may be reasonably addressed by some of the data that Credo is collecting, send us your question.  Ask the Analyst!  If it’s easy for us to pull the answer for you, we’ll do it!  If it’s a complex analysis, however, we’ll let you know what it would cost to take time to discover an answer for you.

Notes about this Publication

This analysis was made possible by funding from TC Media and their wonderful publication Investment Executive.