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Canadians who work with financial advisors affiliated with firms that offer proprietary mutual funds and ETFs are much more likely to own units in that firm’s funds in their portfolios than are advised investors overall. The former group of investors are loyal to their advisors and say they believe they are as much ahead of their financial expectations as investors who don’t hold in-house funds in their portfolios.

These findings are from the Financial Comfort Zone Study. The study is an ongoing national consumer survey conducted by Mississauga, Ont.-based Credo Consulting Inc. in partnership with Montreal-based TC Media’s investment group. (TC Media publishes Investment Executive.)

A report outlining the survey’s recent results states: “When [advisors are] faced with having to decide between two alternative instruments for use in a client portfolio, [when] one is delivered by an external, independent supplier and the other is produced by [the advisor’s] company, many [advisors] are content to opt for the proprietary product. Credo’s study concludes that advisors’ decisions to [recommend in-house products] do not adversely affect their clients, generally.”

As part of the research, Credo asked clients of advisors who work at bank-owned brokerages, mutual fund dealers or retail banks whether the clients invest in one of their advisor’s firm’s proprietary investment funds. On a consistent basis, the percentage of clients who said that they invest in proprietary funds offered by their advisor’s firm was several times greater than the percentage of advised clients overall who invest in products from the same fund manufacturer.

For example, 52% of clients whose advisors work with RBC Dominion Securities Inc., Royal Bank of Canada’s (RBC) brokerage arm, said they invest in RBC funds. In contrast, only 11.4% of all clients who work with an advisor hold units of RBC funds in their portfolio.

“Credo’s [survey] found that every dealer that has a related or affiliated fund company has its advisors using that fund company’s funds in clients’ portfolios to a far greater degree than average,” the report states.

Furthermore, Credo’s research found that when compared by firm, clients who hold units of proprietary funds are just as likely to recommend their advisor to a family member, friend or colleague as are advised clients overall. This trend held true when Credo compared a firm’s clients who hold units of proprietary funds to clients of the same firm who don’t invest in in-house funds.

“There’s no solid quantitative evidence in the data sets we have amassed,” the Credo report states, “to suggest that the practice of loading clients’ portfolios with proprietary [funds] compromises investor loyalty.”

Similarly, clients who hold proprietary funds in their portfolio were just as likely to say they consider themselves to be ahead of their expectations for financial well-being relative to clients of the same firm who don’t hold proprietary funds in their portfolio.

The Credo survey’s findings are not surprising, says Sara Gilbert, founder of Montreal-based Strategist Business Development: “At the end of the day, the client is not buying a product. [He or she] is buying the advisor and the trust [he or she] has in the advisor.”

Of course, the fact advisors are recommending proprietary funds to the extent they are may raise concerns among investment industry critics regarding conflicts of interest – and whether clients’ best interests are being served.

“That companies have vertical integration, both manufacturing products and offering advice, is no surprise because it’s a way to maintain and, in many instances, grow market share,” says John De Goey, portfolio manager with Industrial Alliance Securities Inc. in Toronto and a proponent of banning embedded commissions. “The question is ‘To what extent does an advisor, at the micro level, aid and abet that strategy by recommending those products to [his or her] clients?'”

However, Credo’s research suggests advisors recommend proprietary funds in good faith. Advisors recommend proprietary funds if they believe these products are appropriate for their clients, the report states: “When [advisors] find no substantial difference between two [investment] instruments, except that one is produced by their own [firm], they will opt for the proprietary product.”

The possibility also exists that advisors recommend in-house funds out of an affinity for the firm with which they’re associated, says Dan Hallett, vice president and principal with HighView Financial Group in Oakville, Ont. This is particularly true, he adds, if advisors have the opportunity to interact with portfolio managers at their firms’ asset-management arms.

“If there’s greater access to some of the people behind the scenes, I can see how advisors might have a natural degree of loyalty to their firms,” Hallett says, “even if there isn’t necessarily additional compensation [associated with an in-house product] to incent them to recommend those products.”

Some clients also may trust products bearing the brand of their advisor’s firm, particularly in the case of the big banks, Hallett says: “There’s some comfort in dealing with a large organization – [a] perceived degree of safety.”

As well, clients’ relative indifference to the brand of the funds held in their portfolios may be an indication that clients are more focused on whether they’re on track to meet their financial goals.

“The proportion of clients who want to get involved in what’s in a portfolio actually is quite small,” Gilbert says. “Clients just want to know, ‘Do you have a road map for me to get to where I want to go? [If so, then] OK, let’s go’.”

The online Financial Comfort Zone Study has polled 28,000 Canadians thus far. The survey is meant to gain insights into the relationships among financial advice, financial well-being and overall life satisfaction in Canadian society.