When your financial advisor recommends an investment, you probably assume the process begins with a simple question: What is the best solution for the client?
But at some large financial institutions, there may be another question operating quietly in the background: What products does our company make?
That matters because many financial firms do much more than provide advice. The same corporate organization may also manufacture mutual funds, manage separately managed accounts, issue insurance products, offer structured investments, provide banking services, or sponsor alternative investments.
That creates an obvious conflict.
The firm can potentially get paid once for advising you—and then get paid again when the advice leads you into a product manufactured by another part of the same company.
Sometimes the Firm Says It Out Loud
You do not have to assume these incentives exist.
Wells Fargo Advisors, for example, tells clients in its own relationship summary that it and its affiliates receive additional compensation from proprietary products they issue, sponsor, or manage. It also acknowledges that this creates an incentive to recommend proprietary products over third-party alternatives.
That does not mean every proprietary product is bad. But it does mean the recommendation deserves scrutiny.
If the same financial organization earns more money when you choose Product A instead of Product B, the client should know that before assuming the recommendation was made on a completely neutral playing field.
And regulators have taken action when those conflicts were not adequately handled. In a 2019 case involving BMO advisory firms, the SEC said the firms preferred proprietary BMO mutual funds in a managed-account program, with roughly half of client assets invested in those funds. According to the SEC, that generated additional management fees for a BMO affiliate, while the conflict was not adequately disclosed. The firms agreed to pay more than $37 million to settle the matter.
A Quarter-Percent Can Become Real Money
The danger with these arrangements is that the additional cost often looks small.
Suppose two otherwise identical investments both earn 6% before expenses.
One costs 0.50% per year.
The other costs 0.75%.
On a $500,000 investment, the difference is only a quarter of one percent.
Hardly sounds dramatic.
But after accounting for both the higher annual expense and the compounding those lost dollars could have earned, the lower-cost option would grow to roughly $1.46 million after 20 years.
The higher-cost option would grow to roughly $1.39 million.
That quarter-percent difference leaves the investor with about $68,000 less.
And that is the real issue with small recurring costs: they do not just take money out of your account today. They also take away the future growth that money could have produced.
Now add the conflict.
If the more expensive option is manufactured by the same corporate family employing the person recommending it, you should at least ask: Why this product?
Same Advice—or the Company Store?
The SEC has specifically warned that product menus can create conflicts when firms favor proprietary products, preferred providers, or investments that generate revenue-sharing payments.
Again, proprietary does not automatically mean inferior.
There are excellent proprietary funds and terrible third-party funds.
The issue is independence.
Would the advisor make the same recommendation if their employer did not manufacture the product?
Would they still choose it if their firm earned exactly the same amount regardless of which product you selected?
Would they recommend a competitor's solution if it were clearly better?
Those are harder questions.
And they matter because investors rarely see the corporate machinery operating behind the recommendation. They see an advisor sitting across the table telling them what they should own.
Advice Should Start With the Problem
At Hanover Advisors, independence gives us the ability to take a different approach.
We believe the financial plan should determine the solution, not the product shelf.
Sometimes the right answer may be a mutual fund. Sometimes an ETF. Sometimes an insurance product, a separately managed account, a banking solution, or something else entirely.
The important thing is that the recommendation begins with the client's needs rather than with what a parent company happens to manufacture.
Because when your financial advisor recommends something, you should be confident you're receiving advice, not simply being directed to the company store.