Advice + Products = Conflicts of Interest

October 02, 2020

Large financial firms increasingly want to create products and give advice. It's probably not surprising that the advice they give often leans in the direction of the products they make. We see this commonly, both with individual investors and 401k plans.

A financial firm trying to maintain high margins on the backs of their clients is under increased pressure to find ways to create "margin opportunity" or "margin expansion." (I particularly love "margin opportunity" as a term btw.) One technique is to create a stack of fees: if you become the advisor, and you as the advisor move clients into funds you also make, your internal referral protects the revenue from going elsewhere, and helps the firm overall.

Evidence of this approach appears in firm-owned private real estate funds, private equity vehicles, private Unit Investment Trusts, proprietary mutual funds, or firms just moving clients into their own funds without a careful review of the alternatives. Many of these options, unfortunately for the client, are not easily liquidated (which implicitly reduces their value).

But it's not objective advice, and the business of advice must be objective to be successful. The loyalty, both ethically and structurally within the firm, must only be attached to the client. Internal objectives should not dilute that loyalty.

One Day In July is not in the product business. You won't see our name on the funds in your account. We line up vendors to compete for our clients' capital. Vanguard, Blackrock, Schwab and others make their case via written documents. We do not allow payments, we do not allow bestowed trips or entertainment, and we don't love meetings. Just written arguments.

The effect of this reverberates beyond fees: impartial product selection allows us to focus on only the investments that we believe are optimal for a client's portfolio.

Dan Cunningham