How to protect yourself against `loaded' investment advice
Here's an example of why the financial planning profession is having an image problem, even though the business is fairly new: A friend called a few weeks ago to ask about a mutual fund being recommended by a financial planner/broker who worked for one of the major brokerage houses. He had $5,000 he wanted to invest and wanted to know if I had ever heard of the fund.Skip to next paragraph
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``What's the sales charge on the fund?'' I asked.
``What sales charge?'' he replied. ``He never mentioned a sales charge.''
It turned out the recommended fund carried an 8 percent up-front sales charge, or ``load,'' which the salesman had not mentioned. It is possible that before the $5,000 was handed over, the salesman would have mentioned that $425 was coming off the top, money the fund would have to earn before any real profits could be counted. Still, many investors have put down their money and not learned about the load until they received their confirmation statement in the mail.
Stories like that are mild compared with some of the tales of incompetence, fraud, and abuse reported by the Consumer Federation of America, which recently completed an extensive study of the business, titled ``Financial Planning Abuses: A Growing Problem.''
The report was originally commissioned by the International Association for Financial Planning, which gave the Consumer Federation some money to conduct the study. However, when a preliminary draft received less-than-favorable reviews at the IAFP, the Consumer Federation gave the money back and completed the report on its own.
``We didn't think the report itself was all that negative,'' said IAFP board chairman Charles Lefkowitz, who is also a financial planner in Florham Park, N.J. ``We did have a little difficulty with the numbers.''
The federation's report, he noted, estimates that there are from 250,000 and 400,000 people who call themselves financial planners. The actual number, Mr. Lefkowitz believes, is closer to 100,000.
But the report isn't about numbers. It's about a profession that is almost totally unregulated, and is used by a few planners as a front for selling insurance products, earning commissions on stocks and bonds, and charging front-end loads for mutual funds.
``Our members have listed financial planning abuses as an area they're concerned about for several years,'' said Barbara Roper, author of the federation's report. The study found three main categories of abuse: fraud, incompetence, and self-interest. While the first two problems can be found among many professional groups, self-interest - recommending products based more on the commissions or sales incentives than on the needs of the client - has been a particular problem for financial planners.
In addition to monetary commissions, some mutual funds and limited-partnership sponsors have given all-expense-paid trips to Hawaii, the Caribbean, or another fancy vacation spot, or expensive watches and other gifts to planners and brokers who pushed their products.
The Consumer Federation's report comes as the Securities and Exchange Commission and the National Association of Securities dealers are considering some rules and regulations that would force greater disclosure of fees and commissions, minimum education, and clearly spelled-out penalties for abuse.
Two of the largest financial planning organizations are locked in a debate over this matter. The IAFP wants a federally sanctioned self-regulatory organization, while the Institute of Certified Financial Planners favors a package of model legislation that would be adopted by each state.