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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
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Flaws in the other compensation models
Robinson finds fault with the asset-based and flat-fee models as well, even though both are more transparent than the commission-based model.

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With the asset-based model, there's a strong incentive to keep the assets under management rather than advise that the assets be used for other things, such as reducing debt or investing in real estate. Also, since they wouldn't stand to gain by recommending commission-based products such as insurance or annuity contracts, advisers have no incentive to do so even though it may be in the investors' best interests to buy them.

The flat-fee model isn't perfect either, Robinson argues, even though there's a widespread perception that it's "ethically superior to other compensation models." Among other low paths to take, there's incentive to "pad bills as an hourly practice becomes more systemized."

Robinson concludes that fee-only planning may not be the morally righteous way to go. He recommends that clients be offered a choice of all three models or some combination of them.

True, brokers have been known to churn accounts, fail to disclose risks and costs, embezzle money, and violate trust, Robinson says. "On the other hand, there are abundant examples of fee-only advisers who have breached their fiduciary duty by receiving undisclosed commissions or kickbacks from sales of products or who have defrauded their clients through complex Ponzi schemes."

Moral of the story
So the line used to draw moral distinctions in the financial industry is blurred at best.

The takeaway to consumers is this: If you're too busy to manage your own investments and you feel you must rely on expert advice, make sure you get comfortable with your planner, broker or adviser. Ask a lot of questions. Check a prospect's credentials and find out exactly how compensation is structured. You might ask for a response to a few ethical scenarios to see if you're on the same moral page.

Finally, trust your intuition. If someone makes you uncomfortable, walk away from the relationship. You can't see the neuropeptide levels firing off in your brain, but your gut can tell you a lot.

Bankrate.com's corrections policy-- Posted: May 23, 2007
Read more stories by Barbara Whelehan
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