In 2022 we released a 4-part series of articles that mirrored the seasons of an advisor’s practice. As we share our thoughts and ideas with advisors, we like to choose themes and topics that get people talking. Our 2023 series is designed to be thought provoking, by coming up with new ways of looking at old conversations. Up first, the illusion of the independent dealer.
It is impossible to find an investment or mutual fund dealer in Canada that does not use the term “independent”. Even bank-owned firms say things like “our advisors are fully independent in their investment decisions.” The term independence is so commonly used, and in so many contexts, that we question its’ freshness, originality and even its’ relevance going forward in the investment industry.
It’s an intriguing phenomenon but why should it matter to advisors? To be fair, we use independence in our marketing as well. Having said that, we are at one end of a continuum, far removed from the majority of our competitors. Nonetheless, advisors can be sold a bill of goods on a claim of independence, only to find out later, in reality, it is quickly diluted.
Most investment professionals agree that Canadian banks are not independent. With the significant public shareholder position, they have an infrastructure geared towards the brand of the bank, and not the brand of an advisor. As a result, it’s easy to see that a bank advisor’s “independent decisions” are never all that independent. Travelling to the next dealers on the continuum, we find dealers controlled by large non–bank, yet still publicly traded financial institutions, dealers controlled by private equity firms, and dealers controlled by U.S. parent companies – all who claim to be independent. For larger organizations, we have seen the right infrastructure to help them maintain independent operations, but smaller siloed firms under a parent can’t hang onto the reigns of independence for long. Then come dealers with advisors who are “encouraged” (or required) to promote proprietary products despite the inherent lack of independence that comes with narrowed dealer branded products. Finally, and maybe most fascinating, dealers whose entire recruitment strategy is focused on selling in the next few years claim to be independent.
The lack of independence in many cases is readily seen by advisors, although we suspect that clients wouldn’t know to ask or even realize how this superficial independence trickles down to them. Dealers owned by publicly traded companies are raising fees, minimum production volume, and doing what’s necessary to raise their share price. Further, there have been unintended consequences in response to tightened Know Your Product rules, a solution that creates increasing pressure to support proprietary products. While these actions aren’t happening across the board, the risk exists.
A trend we’ve been noticing now too is that many dealers are shifting away from focusing on assets under administration (AUA) to focusing on assets under management (AUM). The truth is many of our dealer competitors are turning into fund companies. Of course, AUM is significantly more profitable than AUA for a dealer, but why would a client care about that? What ever happened to the fundamental concept that clients’ interests come first in their dealings with advisors and dealers? When an advisor receives a big cheque to transition from one dealer to another, and/or in exchange for recommending proprietary funds, how is that “client focused”? How can that dealer claim to be independent? Even further, we wonder why that is even allowed?
How can you be sure if your dealer is independent? Well, first remove your dealer from the “independent” list if their shares, or their parent company’s shares are publicly traded. Second, ask direct questions and hold them accountable. Ask them if they need outside approval before implementing changes. Ask them to put the makeup of the Board and voting structure in writing. Ask them if they are for sale and who makes that decision. The answers will be harder to get than you think. However, that’s the dilemma which affects you and your clients in the long run – is your dealer really independent? Or just an illusion of independence?