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Columns: Boomer Bucks
Barbara Mlotek Whelehan   Expert: Barbara Mlotek Whelehan
Boomer Bucks
Hiring a financial adviser requires due diligence
Boomer Bucks

Morality in the financial arena

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 issue
The perception exists that investment advisers take the high road in the financial industry, but that's not necessarily the case.
Not a black-and-white issue
Brokers get a break
Brokerage customers face decisions
Study: how advisers levy fees
Flaws in the fee-based compensation models
Moral of the story

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.

Next: "The Financial Planning Association sued the SEC in 2004."
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