In recent years, several large Canadian institutions announced that some of their divisions are no longer offering third-party products, which are investments from outside companies. This allowed them to focus on offering proprietary, or in-house, solutions. This simplifies the experience for their clients, making it more efficient and convenient. It’s also advantageous for businesses with a large sales force and distribution model, to have focused, and directed options.
That said, this decision has been met with scrutiny, as it could make it more challenging to deliver an investment strategy that best fits an individual’s unique circumstances. Understanding the pros and cons of proprietary investments, as well as the benefits of working with an advisor that is unconstrained in the solutions they offer, addresses these potential limitations objectively.
What are proprietary investments?
Many investment firms create and offer their own specific investment options. They are usually called things like wrap, pooled, private funds, or separately managed accounts. The term proprietary means that these investment options are exclusive to that company. You can only buy, sell, or hold these funds if you’re a client of the company that made them. You can’t go to another firm to invest in these specific options.
The pros
Our team does consider proprietary investments as part of our recommended solutions. They are primarily used to complement other investment strategies. This is because they offer the following benefits:
Global investment expertise: This means that you have access to leading global asset managers, that you might not be able to access on your own.
A cost-efficient portfolio: Due to economies of scale, preferred rates, and household pricing, your portfolio management costs may be lower.
A sophisticated, yet simplified approach: Your portfolio benefits from professional oversight and management. This means that your portfolio includes strategies that respond to changing market conditions and are continuously managed on your behalf.
The cons
Potential drawbacks include:
You might not own the underlying investments directly: If you ever want to shift gears, whether to manage your money on your own, or to move to a new firm, your investments may have to be liquidated into cash. This can have negative consequences in terms of time out of the market, as funds are being moved from one company to another. In the case of non-registered accounts, there is the added consequence of realizing capital gains and/or losses as investments are liquidated.
Tax planning opportunities are limited: As proprietary investments are often managed in bulk, you may get an unwelcome surprise at tax time if the fund manager has chosen to realize gains. These changes are not always clearly communicated in advance and there’s little you can do about it either way. This is important as you could have a year where capital gains realized on other assets result in an unusually high tax bill. An example would be if you sold an income property at a profit; as such you might want to limit any gains realized in your non-registered portfolio that year.
The account investment mix is set: When you want to start drawing from your portfolio, in many cases you cannot select which asset class, such as fixed income, Canadian stocks, U.S. stocks, etc. that you want to draw from. Your investments are liquidated indiscriminately, meaning that a percentage is taken from every category to generate the needed funds; this is done to maintain the overall asset mix of the account. Many individuals draw from their investments monthly, which means that selling occurs regardless of current market conditions. Imagine drawing a monthly amount in March of 2020 when markets experienced sharp declines in a very short period.
Alternatives: Working with a team that is unconstrained in their offerings.
Working with a wealth management team that is unconstrained in their offerings solves for some of the limitations of proprietary investments, as we can:
Offer direct investment in individual stocks, bonds, mutual funds, and exchange-traded funds: This gives you the freedom and flexibility to move your portfolio in kind (as is), should you ever need to. In non-registered accounts, you also have the flexibility to realize capital gains or losses for tax planning purposes.
Create a custom portfolio cash reserve for expense needs: This ensures that you have adequate funds set aside for planned expenses. We target a two-to-three-year reserve, to allow you to weather any short-term market volatility. We then trim from the growth component of the portfolio, following a period of gains, to be mindful in replenishing the reserve. This gives you the peace of mind to know that you are not selling in a down market to meet expense needs.
The bottom line is that we feel there is no “one size fits all” investment. Recognizing and respecting individual differences is a crucial aspect of creating inclusive and effective solutions in many aspects of life. There’s value in seeking an advisor or company that offers truly unconstrained solutions, that can objectively assess the benefits and drawbacks of your existing strategies. At the very least, you will be investing with eyes wide open.