Product vs. Process
For example, many investments which are recommended to clients are in-house, so the “advisor” is also in essence a salesperson for their firm. Even if there are dozens of products investment advisors can offer, clients cannot receive customized, objective advice with product-based service which creates a serious conflicts of interest issue.
In contrast to a professional who sells products, an advisor who offers a process will not be inclined to impose investments onto his or her clients. Instead, the advisor will, along with the client, develop guidelines and a philosophy for investing which will frame the investment decisions over time.
The range of options available to such an advisor’s client is as infinite as the advisor’s willingness to research. Clients who are served products from a list are ultimately receiving a service designed for somebody else (or no one in particular). Process-based investment consulting, however, involves the creation of an investment mandate in accordance with each client’s particular needs. This process-based approach is vital to ensure there are no conflicts of interest.
Following the Money Trail
Part of the product vs. process distinction is recognizing where investment professionals make their money. “Advisors” who offer products rather than a process may receive all or part of their compensation for offering certain investments over others. This fee structure is wrought with conflicts of interest.
Wealthy individuals and families are best off with a trusted advisor who gets his or her income from only one place: the clients. Part of offering a process instead of products is limiting non advisor-client compensation and, when applicable, forwarding all tertiary fees right back to the clients.
Regardless of whether clients receive products or develop a process with their investment professional, clients should ask questions about fee arrangements. They should try to ensure that at least the lion’s share of their professional’s fee is coming from clients and not from third parties with conflicting interests.