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.

``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.

Not surprisingly, one group, the National Association of Personal Financial Advisors, was much more supportive of the federation's report. All of NAPFA's members are ``fee only'' planners who do not sell any financial products and so do not receive any commissions, fees, or gifts for their efforts.

``As long as there's a conflict of interest there, you're going to have problems,'' says James Edmunds Wilson, a planner in Columbia, S.C., and a member of NAPFA's board of directors.

But a comprehensive and personal financial plan from some - though not all - fee-only planners can be prohibitively expensive for many people, ranging up to $1,000 for the first visit and preparation of the preliminary plan. The alternative, then, is to go to someone who earns a commission, or a ``fee and commission'' planner who charges a fee (which may be smaller than a fee-only planner's) and receives a commission. With this group, the planner can recommend a course of action, and the client can buy the products from that planner or find investments - perhaps no-load investments - on his own.

Whichever kind of planner you choose, the Consumer Federation has some suggestions to at least minimize the likelihood of problems with fraud, incompetence, or self-interest:

Be sure the planner is a registered investment adviser. While this doesn't guarantee quality, at least it shows that the planner is willing to have his or her name listed with some regulatory body.

Ask for and read a copy of the planner's disclosure statement. It should include information on the planner's education (or that of a planning firm's members), professional background, how they're paid, and any history of securities violations.

Interview several planners before choosing one. A planner should give you a half hour or so of time at no charge, to discuss things like education, fees, and your needs, goals, and risk tolerance.

Do not work with a planner who pressures you to make fast investment decisions, or who won't give information on sales commissions or incentives. A planner should be willing to discuss ``low load'' investment products where the commission is more like 2 or 3 percent, instead of 8 percent.

Be very careful in giving a planner discretion over your funds. The safest course is not to let a planner make any investment moves without your permission, though you might permit the planner to sell something when the market is turning down suddenly, but not let the planner make any purchases without your consent. Then review every trade yourself by looking at the actual paper work from the brokerage or mutual fund, not a planner's review of the transactions.

The best source of information about a planner might be friends or family members who have had good experiences with competent, honest planners. If you ask around, you may find a planner this way.

You can get a copy of the report by sending $10 to Consumer Federation of America, 1424 16th St., NW, Washington, DC 20036. If you haven't hired a financial planner before and think now is the time to do so, it will be a well-spent ten-spot.

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.

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