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Does our sense of right and wrong stem from principles we
learn in our environment -- at home, church, school
and work? Or are moral intuitions "unconscious,
involuntary, universal" -- and hard-wired
in our brains, as some neuroscientists believe?
When humans face moral dilemma, competing neural
networks stage an internal fireworks display. "Trust
is a measure of neuropeptide levels, while fairness is an electromagnetic pattern
in the right prefrontal cortex," says Robert Lee Hotz in a Wall Street Journal
article on the subject.
I can't help but wonder how neural
pathways light up in the minds of brokers and
investment advisers when they convene with clients
to discuss personal finance matters. Morals are
constantly tested in the financial arena, where
the temptation to serve oneself is pitted against
a sense of duty to serve others.
| The perception exists that investment advisers take
the high road in the financial industry, but that's not necessarily the case. |
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Not
a black-and-white issue
The media tend to portray brokers as rogues
wearing black hats while investment advisers don white hats. Brokers got a bad
rep because they've been accused of selling products that pad their own income
rather than make money for investors. Investment advisers don't have incentive
to sell products but rather to increase your assets, and these appear to be aligned
with investors' best interests. But the distinction is not that simple. A
recent study reveals that the financial field is rife with opportunities for
abuse by financial advisers no matter which agency they are governed by, how they
structure their fees or what code of ethics they follow. More
about the study to come. First, let's get up to speed about
a controversy that has been brewing between brokers and investment advisers over
the past several years. Under the Investment Advisers Act
of 1940, registered investment advisers, or RIAs, must adhere to fiduciary standards
that require them to place their clients' interests first.
Governed by the Securities Exchange
Act of 1934, brokers are held to a standard of
suitability in their recommendations. That means
the products they sell must be suitable for their
clients. This is considered less rigorous than
the fiduciary standard of RIAs.
So advisers have enjoyed a moral edge for years because
they assume a selfless role. Brokers
get a break
In 1999, brokerage firms began rolling out fee-based
accounts in response to market forces, much to the dismay of RIAs. The Securities
and Exchange Commision (SEC) gave the brokerage industry its blessing by proposing
a rule that exempted these fee-based brokerage programs from the higher fiduciary
standards of the Advisers Act. Brokers could dispense "incidental" advice
but didn't have to be RIAs, and they were required only to disclose to clients
that these accounts were brokerage accounts.
RIAs howled that this development
was unfair because it mimicked their business
model and put them at a competitive disadvantage.
It was also unfair to consumers, they argued,
who might not be completely aware of the looser
suitability rules to which brokers are held.
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