You’ve probably noticed on your trips to the grocery store that in-house brands take up ever more shelf space. Grocery chains promote their private labels because they earn them higher profits while shoppers choose them for their lower prices.
That’s a good deal for everyone as long as the quality of the in-house brand is equal to or better than name brands. The proof is in the eating, of course. If you’re not satisfied with a product, you can simply go back to your favourite brand or try something else.
Unfortunately, it’s not so easy when it comes to private label investment funds—those manufactured by Canadian banks and life insurance companies for sale to their own clients.
The shopper, in this case, is a retirement saver who is trying to navigate the complex world of investing. The seller is an investment advisor whose firm earns extra profit by selling their own funds over the offerings of third-party fund companies.
Clients rely on advisors for unbiased advice
Poor-quality investments are not something you can taste or smell. That’s why most investors depend on their advisor’s recommendations when it comes to purchasing funds.
But when those recommendations are coloured by conflicts of interest like selling your own firm’s proprietary products, you have a problem that merits attention.
Indeed, Canada is the only jurisdiction where advisors can sell proprietary products. In the U.S., for example, the practice is forbidden, according to a recent article in Investment Executive newspaper.
Yet, some big Canadian firms push it even further by paying incentives to advisors for selling in-house products, even though the practice is against the rules.
The situation is driving sales of poorly performing investment funds in Canada, says Darcy Hulston, president and CEO of independent mutual fund manager Canoe Financial. Hulston told Investment Executive he believes regulators may eventually respond by cracking down on the sale of proprietary funds.
Regulators shy away from sweeping change
I’d love to see that happen, but I’m not holding my breath. So far, regulators have shown little inclination to take on industry heavyweights by making that kind of sweeping change.
But that doesn’t mean we should stop pushing to get conflicts of interest out of the investment industry. We have to keep up the pressure up until Canadians enjoy the same fundamental protections as in other parts of the world.
My bet is the investing public will like the way that tastes a whole lot better.