The Hidden Truth about How Many Large Investment Firms Pick the Investments They Offer – Part 1: Company Products AKA Proprietary Products

This is going to be a mainly an opinion piece explaining about why when you walk into a certain company that you get certain investments presented to you. I may break this up into either two or three parts as the topic is broad based and has many interesting details to learn about.  Also, this series will help you understand why I no longer work for large corporations and why I became an independent representative working with a small, independent broker dealer.

First of all, I used to work for a large financial institution with over 10,000 financial advisors. I worked there for a decade before I began to figure out what I’m about to share in this series of blogs. To this day, many of those advisors still have no clue about this.  Basically, it is in regards to how a company decides what their advisors offer to their clients.

I was motivated to write this when I saw a recent article in the New York Times about how JP Morgan was fined $307,000,000 to settle accusations that it steered clients into their own funds and hedge funds ( The interesting (and not mentioned) part of the story, and the many, many stories like this, is that the actual financial advisor doing the selling really does NOT make any more money by using company products.  So why do they do it?

The answer is not simple and has many different parts to it. First of all, while the investment advisor doesn’t make any more money, the management above them and the corporation does.  The manager typically gets a very large bonus (can be in excess of $100,000) if the people in their office sell a certain amount of company products.  And the corporation makes more money by selling their own investment products.  So the company and local management does LOTS AND LOTS of training around company products to get the advisor feeling comfortable about them, so they sell them more.  Imagine if you were a new advisor and you had ten training sessions about company products, so you learned about them and felt comfortable with them, but only had one from outside product sponsors.  What would you do?  You would probably sell more company product because you were trained on how good it is and felt comfortable offering it.  That is why corporations do lots and lots and lots of training on their products and how to present them.

Here is a personal story to drive that point home… I remember back around 2004 when I was sent on a trip to a beach in California.  I was doing well at the time and it was framed as an educational reward trip to learn about investment products and ideas.  It turned out that me and all the other advisors there had one thing in common.  We were all high producing advisors who did NOT sell many company products.  We quickly figured this out and weren’t surprised by what turned out to be a two day event of getting hammered (educated) to sell more company products.  Too bad for them it didn’t work and me and the other advisors just went about our daily business of selling what we thought was best for our clients.   However, it shows the length to which a company will go to in order to ‘educate’ their advisors about their products to gain more internal sales.

My next blog will discuss how even when large financial companies offer other investment products, that they typically only do so when they get kick backs known as ‘revenue sharing’ arrangements. This is a huge thing in the industry and almost no clients know about it and very few financial advisors understand the degree to which it affects their business.  Until next time!