Recently I was meeting with a couple for the first time and as I was reviewing their statements I couldn’t help but notice all of their statements and investments were from the same company. This surprised me greatly. For all intents and purposes, we will call this company “The P Company” for proprietary products. This story is absolutely true; however, I prefer to keep this large and well-known company anonymous in hope that many of their advisors do not recommend the same products as this representative willingly did.
The couple had products from “Company P” which included IRA’s (which were invested in variable annuities issued by company “P”), non-retirement accounts (which were managed by “Company P’s” investment arm), and of course life insurance offered by “Company P”. What is even more alarming is they offer proprietary products under different names to possibly help mask their proprietary products from clients. If you don’t already know, a proprietary product is when a company manufactures an investment product and hires their representatives to sell it to you. Generally, no outside representative can offer the product to you and these representative may have more incentive to recommend it to you. If you ever decide to leave the firm and transfer your account then you will need to sell the proprietary products before you leave and this may create a taxable event.
Now you may be asking yourself, but Ryan WHY is this such a big deal? I generally answer this question with several other follow-up questions such as:
When you need surgery on your shoulder or another particular body part, do you go to an orthopedic surgeon or do would your run of the mill general family practitioner do?
When you have a plumbing emergency, would you settle for an electrician or hire a licensed plumber?
Would you recommend McDonalds if you were craving sushi?
I view financial products and investment vehicles in the same light. Certain companies have their niche markets and that is all they focus on. There may be certain companies that are good in multiple areas, but I have yet to see a company be great in all categories. The other area of concern is most investment companies share research and have similar views on the economy across all of their investment offerings. This means if the company’s view is wrong, it may have a negative impact on your entire portfolio instead of just a small portion of it.
Furthermore, you should be wondering why these financial representatives are recommending these products? Is it based on a financial plan or just because they need to reach their sales quota? After I received my CFP® designation, I was recruited by another large company I will call “Q” for quotas. Company “Q” had buckets of products the financial representatives needed to reach each month in order to receive a bonus. These buckets included mutual funds, managed accounts, annuities and insurance. Even more terrifying, these buckets also included proprietary products. If it is near the end of the month or end of the quarter, is the advisor recommending products that will help them achieve their well desired bonus or are they recommending the product because it makes the most sense for you?
Going back to the new clients I recently met with, they were recently sold life insurance. What I did not tell you was that they were 60 years old, no mortgage, no kids, both working and plenty of liquid cash. I asked them why the representative recommended life insurance and they could not answer me? After showing them their financial plan, it didn’t really make much sense for permanent insurance at this stage in their life based on their unique situation. In fact, the life insurance premium they were paying would have made more sense to purchase long term care insurance based on their retirement plan. Plus, the premium of the life insurance was possibly more than the long-term care premium. It got me thinking and “company P” does not offer long term care insurance, so the representative had no incentive to recommend it.
The two companies “P” and “Q” are very large firms and I bet each one of you reading this have seen commercials or may have actually purchased investment products through one or both of them. Just because a company has brand recognition does not mean they have your best interest at heart. To them you might just be a number instead of a client. If you have an 800 number for a call center or your financial rep seems to be more like a speed date with how many times the name on your statement has changed, I would STRONGLY suggest a second set of eyes to take a look at your portfolio to make sure your portfolio is in line with both your short and long term financial goals.
As a client, you should ask your advisor some tough questions. Below is a quick list for you:
- What are your reasons for the products you are recommending? Is it based on my financial plan?
- Do you offer proprietary products? Will you tell me when you are recommending one of these products and can you compare them to some alternatives that might be out there?
- How are you compensated? Do you receive more compensation when you recommend these products?
- What happens if you leave the firm, who becomes my financial advisor?
Remember it is your ultimate responsibility to hire someone who is aligned with your goals not their company’s goals. If your investments include one company name that is also the name of the company where your representative works you may want to double check your portfolio and ask the tough questions.
Ryan J. Marshall, CFP®