Conflicting Investment Advice

Does your investment advisor really have your best interest at heart? You might think so but there are far too many advisors out there who are still pushing whatever investment products onto their clients that pay them the most fees.

Just last week, the Ontario Securities Commission (OSC) approved a settlement agreement with the mutual fund arm of RBC bank for offering higher commission fees to its reps for selling proprietary funds. This settlement agreement confirmed that between 2011 and 2016, they paid their reps an extra 10 basis points in commissions for selling RBC portfolio series funds over other options that could and likely should have been offered to their clients.

An extra 10 basis points (0.1 per cent) may not sound like much but these added fees totalled up to $24.5 million paid to their reps, which sounds like a big motivator to me. Before you think that RBC is alone in creating these conflicts of interest, I have seen many other examples of similar proprietary product incentives from numerous investment and insurance companies.

The total penalty for this very intentional decision? A measly $1.1 million fine dubbed an “administrative penalty”.

I decided to look at the numbers behind this particular case to see just how much money they had likely earned by pushing in-house investments onto their unsuspecting clientele. Their portfolio series funds have a built-in management fee of around two per cent per year, so an extra 10 basis points each year would suggest a couple of hundred million dollars was put into these products.

As stated above, RBC charges an annual management fee of two per cent per year. So, for each $100 million of client money that sat in these accounts, RBC sales reps, portfolio managers and shareholders would have brought in roughly $2 million of fees each year. You start to see why they would be willing to pay up a one time $1 million settlement penalty.

Since coming to the attention of the regulators, RBC has stopped this conflicting interest sales policy. You can be assured however that many more such conflicts still exist across our industry and enormous amounts of client’s hard-earned money is being subjected to such practices.

At what cost you might ask? I took a peek at the five-year average return for the RBC Select Balanced Portfolio Series fund the other day and it averaged 7.93 per cent. I then looked at some of the biggest third-party funds in the same asset category with similar objectives and risk and found five-year averages between 8.6 and 14 per cent per year – noting that these were the first few funds that came to mind that we use, and I didn’t go looking for the highest returns out there in the asset category.

Again, using simple math, I found that a one per cent lower return over a five-year period would equate to clients losing out on $5 million for every $100 million invested. This is not to say that the in-house investment offerings will always be the worst option, but you would certainly want an advisor who is recommending what they think makes the most sense, not what will pay them a higher commission fee.

Most professionals will have some types of conflicts of interest in their practice field but its how you handle them and disclose them to your clients that will define what type of job you do.

I continue to advocate for regulatory reform that would see a simple and easy to understand fee-based structure as the only fee option for all advisors in addition to a fiduciary duty standard to get rid of these types of conflicts. In the meantime though, it is left up to you to decide if you are getting good quality and unbiased advice.

One simple way to check for a conflict is to check on the quantity of “in house” investment products that your current portfolio contains. If you are invested with a major financial institution and the bulk of your portfolio is made up of funds sold by that same institution, it may be time for a second opinion.