Bias Questions Arise With Financial Planners Jun 17, 2005 Wall Street Journal, Print Edition By KAREN DAMATO

Staff Reporter of THE WALL STREET JOURNAL

June 17, 2005; Page C1

Investors who buy mutual funds through brokers aren't the only ones who should wonder if the advice they receive is unbiased.

Many financial planners and accountants who charge fees for their services also sell mutual funds and other investments for sales commissions. They do that as representatives of securities firms that may promote certain funds in conjunction with extra payments the firms receive from those fund families -- a practice known as revenue-sharing.

These payments have received extensive scrutiny at some of the nation's largest securities firms, which have begun disclosing more about them.

But potential conflicts of interest involving financial planners and accountants received little attention until last week. That is when the National Association of Securities Dealers announced settlements with more than a half-dozen securities firms used by outside planners and accountants.

One is Linsco/Private Ledger Corp. , which has more than 6,000 representatives and the highest revenue among firms serving independent advisers, according to Financial Planning magazine. Others are H. D. Vest Investment Services, a Wells Fargo & Co. securities unit that primarily serves accountants, and six securities units of insurer American International Group Inc.

The NASD alleged that, from January 2001 through December 2003, the firms violated its rules by favoring the sale of particular mutual funds in exchange for securities-trading commissions the firms received from those funds. In August of last year, the Securities and Exchange Commission barred mutual funds from making such arrangements, saying investor assets shouldn't be used in that manner.

The firms agreed to pay fines -- as much as $6. 6 million at one of the AIG units -- while neither admitting nor denying the charges. Linsco/Private Ledger, H. D. Vest and AIG say they stopped accepting what is known as directed brokerage in late 2003 or early 2004.

But it is still standard practice for fund companies themselves to pay securities firms for shelf space, creating the potential for conflicts.

The NASD settlement and materials on the securities firms' Web sites show that planners and accountants who work with these firms are likely to hear far more about some funds than others, and may even have a financial incentive to sell the securities firms' preferred funds.

At Linsco/Private Ledger, the NASD found that 29 of the 135 fund companies whose funds the firm offered in 2001-2003 paid for "preferential treatment, which included enhanced access to the firm's sales force, participation in firm meetings and placement of promotional material on the firm's internal website. "

The firm's Web site lists 24 fund companies that currently make payments to "support our marketing and sales-force education and training efforts. " LPL Executive Vice President Jon Eaton said in a prepared statement that advisers affiliated with LPL "provide unbiased advice, recommending only those investments that best meet their clients' objectives. " He also said the advisers don't receive higher commissions when selling preferred funds.

But the LPL Web site suggests that advisers can nonetheless pocket more money when selling these funds: the fund firms subsidize some or all of the $23 charge advisers generally pay LPL on fund orders they place for clients. LPL officials declined comment on these fees, known as ticket charges.

Similarly, at AIG, planners "do not receive additional compensation for selling one product over another and do not receive any portion of the revenue-sharing payments" paid to AIG, said spokesman John Pluhowski. But at the company's Royal Alliance Associates Inc. unit, for example, the $12 ticket charge is waived when planners sell funds from the 14 fund companies in the Elite Partner Program, according to the Royal Alliance Web site.

Mr. Pluhowski said the waiver doesn't pose a significant conflict because the dollar amount is small and there are ways to avoid paying a ticket charge, even on a nonpreferred fund.

The H. D. Vest Web site lists 12 fund companies that have made payments to that firm over the past year and receive "enhanced access" to the company's sales force and "heightened visibility" in company materials. Nonetheless, the accountant affiliates are independent business owners who "are going to do the right thing for their clients," H. D. Vest President Roger Ochs said.

Mr. Ochs also said the company has ended programs in which some advisers got financial benefits based on high sales of the preferred funds -- programs the NASD alleged violated its prohibitions on rewards tied to selling particular funds.

Daniel Moisand, a financial planner in Melbourne, Fla. , and the president-elect of the Financial Planning Association, said the favored treatment given to some funds didn't affect his recommendations to clients in the past when he worked as a fee-plus-commission planner. "I never once gave any of that any consideration," he said. Nonetheless, he has switched to charging only fees, partly, he said, so "I no longer worry about clients wondering where my allegiance lies. "

Investors should realize that planners and accountants can wear multiple hats -- as advisers and as salesmen -- that involve different legal obligations to clients. People providing advice for a fee must generally register with the SEC as investment advisers and are legally charged with acting in the client's best interest. They also are required to spell out how they are compensated and any potential conflicts of interest. Certified financial planners and certified public accountants also have disclosure and ethics requirements in their professional codes. But the requirements for sellers of securities are generally seen as less stringent -- for instance, the investments they recommend must be "suitable," or reasonable, choices.

"There is way too much opportunity for confusion" about a professional's role and obligation, said Harold Evensky, a fee-only planner in Coral Gables, Fla.

In April the SEC adopted a rule that allows securities firms to provide some fee-based services without registering as investment advisers and asked its staff to study the regulation of advisers and brokers. The Financial Planning Association, which represents planners, is challenging the SEC rule in court. Under the rule, "it is too easy to represent yourself as an adviser, but then be regulated like a salesperson," said Mr. Moisand. 

Spraker, Fitzgerald, Tamayo & Moisand, LLC offers comprehensive wealth management services to individuals in or near retirement, corporate executives, professionals, business owners, and other high net worth individuals. The firm, registered with the U.S. Securities and Exchange Commission, offers estate planning, investment management, cash flow and income tax strategies and retirement planning. Spraker, Fitzgerald, Tamayo & Moisand, LLC currently manages a combined total of more than $90 million. They operate out of offices located in Maitland and Melbourne and can be reached at 407-869-6228 or online at www.SprakerFitzgerald.com.