In the ongoing debate between the good and bad of competing product lines, there are often some interesting reasons given for the product recommendations.

Take the use of actively managed and passively managed products, for instance. The variations on active management are nearly endless.

Meanwhile, there are three distinct paradigms for passive management: the Fama/ French Three Factor Model espoused by Dimensional Fund Advisors, the market capitalization approach favoured by numerous product manufacturers (e.g. Barclay’s, Altamira, Vanguard) and the Fundamental Indexing approach favoured by Claymore and Pro Financial. All three share the belief that markets are highly efficient but they differ on many other factors.

What I find interesting is the reasons some advisors give for not using these products. In particular, a number of MFDA advisors often say they would use passive products if only they were licenced to do so. They point to the fact that since some passive products (i.e. those from Barclay’s and Claymore) are exchange-traded, they are precluded from offering them. This is undeniably true.

Of course, the products offered by Altamira and Claymore are nearly identical in their structure, performance and along with Dimensional, offer MFDA advisors access to all three passive paradigms. In fact, Altamira’s index funds have been around since the turn of the millennium, DFA’s asset class funds have been around for over half a decade and even Pro Financial’s funds have been around for more than two years. In short, there is nothing stopping an MFDA licenced advisors from offering passive products to their clients if they wish to do so.

As a result of this, I have come to an opinion about those advisors who point to licencing issues as their sole reason for not offering passive alternatives to their clients. My sense is that the stated reason is not the real reason. Rather, it is a means of rationalizing a course of action in terms that clients are unable to refute with certainty. I can’t prove it, but then again, my sense is that that’s why the people who say these things say them in the first place.

To be clear, people should recommend actively managed products if that is their wish. I’m not asking advisors to change their recommendations. What I’m asking is that advisors be entirely truthful in portraying the reason they recommend what they recommend when they are asked.

We advisors need to be clear that some passive products (e.g. those from DFA and Pro Financial) are available with trailing commissions. Not all passive products offer trailing commissions, however, and none are available in a deferred sales charge option.

My impression is that it is many advisors’ choice of a business model (i.e. embedded compensation as opposed to asset-based fees) that best explains the relative lack of recommendations for passive product lines in the MFDA world. I don’t mind people coming to whatever product conclusion they come to based on whatever reasoning they use. What I mind is when advisors use red herrings to justify those product recommendations to their clients.

Why not reflect upon your own behaviour? Many advisors talk about how their value is in the trust they have spent years developing with their clients and a big part of that comes from giving straight answers to straight questions. Your choice of a compensation model and your preferred product recommendations are important considerations. To the extent that one drives the other, clients ought to be informed.

John De Goey, CFP, is the vice president of Burgeonvest Bick Securities Limited (BBSL) and author of The Professional Financial Advisor II. The views expressed are not necessarily shared by BBSL. You can learn more about John at his Web site: www.johndegoey.com.

Originally published on Advisor.ca