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The sale of proprietary products in Canada is creating problematic conflicts of interest and driving sales of poorly performing investment funds, according to Darcy Hulston, president and CEO of Canoe Financial LP, who spoke in a panel discussion at the Strategy Institute’s fourth annual Canadian Funds Summit in Toronto on Monday.

In fact, Canada is the only jurisdiction in which advisors can sell products their firms manufacture — a practice that Hulston calls “vertical integration.” In the U.S., he noted, advisors are forbidden from selling their own firm’s products as that’s perceived as a conflict of interest.

With regulators focusing increasingly heavily on conflicts of interest, regulators may eventually crack down on this practice, Hulston said in an interview with Investment Executive at the conference: “Regulators’ principal concern is to avoid conflict of interest. If two product offerings are the same, and one pays you more than the other, you avoid it, because that’s a conflict.”

Proprietary product sales are having a considerable influence on fund sales in Canada, Hulston argued.

“What you’re seeing often is inferior asset management selling better than a good active manager,” he said. “That is, I believe, because of these vertical integrators. I don’t know how sustainable that is.”

On the topic of investment fund fees, Hulston said it’s positive that competitive pressures are driving fees down — and he expects that trend to continue.

“We have dropped fees, and that’s a good thing,” he said. “We should continue to find ways to scale up and pass fee savings on.”

However, Hulston said the industry needs to do a better job of educating investors on the difference between actively managed funds and passive index funds and the reasons why actively managed funds are more expensive. Given the growing popularity of passive investment strategies, he said there’s a growing focus among investors on finding products with the lowest fees.

“Active management and passive management come with two very different cost structures,” he said. “I think we’ve done a bad job in this country [of helping] investors to understand the difference between active and passive and identify good active management and bad active management.”

Although fees should be one consideration for clients, he said putting too much emphasis on fees could cause clients to lose sight of other important considerations, such as performance and the track record of a fund.

“Canadian investors have been exposed to very, very bad active managers,” Hulston said, adding that active investment managers should be able to demonstrate a track record of producing alpha in order to justify the fees that they charge.