Disclosure would help financial planners

February 07, 1993|By Thomas Watterson | Thomas Watterson,Boston Globe

A story in the Sunday Business section listed an incorrect phone number for the American Institute of Certified Public Accountants. The correct number is: 1-800-862-4272.

The Sun regrets the error.

Financial planners had several chances to continue raising the standards of their profession in 1992, but couldn't manage it. Maybe they'll do better in 1993.

The delay is unfortunate for the industry, because as people start putting their income tax records together in the next few weeks, many will once again ask themselves whether they need long-range financial and investment advice. They will be good candidates for financial planning. Meanwhile, the growing affluence of the nation's aging baby boomers should give planners another huge source of clients.


But by failing to come to terms with one issue, many people will not have the confidence in financial planners that is needed to make this business grow.

The issue is disclosure.

Simply put, every person who performs financial planning services, including those who sell investment products or insurance policies, should disclose the dollar amount and timing of any compensation they get for selling those products. That includes front-end loads, back-end loads, 12b-1 fees, redemption fees, prizes and any other incentives the planner might receive for selling mutual funds, stocks, bonds, life insurance or limited partnerships.

The commissions should be stated in general terms before any products are sold; then, the exact dollar amount that the planner will receive should be disclosed in writing before the customer agrees to buy.

Consumers interviewing financial planners should ask for this information. After all, if you can see how much you're really paying for an investment, you can assess the planner's motives for suggesting it. You can also decide whether fee-only planning is really too expensive or whether you're paying more in commissions over the long haul.

While full disclosure seems like a reasonable concept, most financial planners don't see it that way. After a long debate, one ++ of their largest trade associations, the Institute for Certified Financial Planners in Denver, adopted a new Code of Ethics and Professional Responsibility in June that fails to require disclosure.

A few months later, the group led the lobbying effort in Congress against an investment advisers bill that would have required advisers to disclose the dollar amount of fees and commissions. The bill died, but it will likely be reintroduced in 1993, says Barbara Roper, a financial planning consultant with the Consumer Federation of America.

Such a bill might not be required, however, if the Securities and Exchange Commission is willing to issue a regulation that would require advisers registered with the SEC to practice full disclosure. "If we have a more aggressive SEC, you might be able to get disclosure, anyway," Ms. Roper says.

That's not the best way to go about it, says Robert Glovsky, a planner with Tofias, Fleishman, Shapiro & Co. in Cambridge, Mass.

"Things like that are better done on a local level than a national level," he says. A fee-only planner, Mr. Glovsky says consumers should know how planners are compensated, the percent of their income derived from fees and commissions and how much each financial product costs. That way, the consumer can decide whether it's cheaper to buy the product that carries a commission or to pay a fee to the planner, he says.

At least one association will meet the disclosure issue head-on in 1993. At its annual meeting in May, the National Association of Personal Financial Advisors, which includes about 300 fee-only planners, is expected to adopt its own code of standards, says Janet Briaud, the president of the organization and a planner in Bryan, Texas.

A planner won't even have to be a member of the group to follow the code. "We tried to come up with some basic standards for all financial planners, even if they are receiving commissions," Ms. Briaud says. "The standards are going to be very simple. They'll help consumers identify the planners they want to work with."

The code, of course, will call for full disclosure of fees and commissions. "Once you have full disclosure, the customer understands what they're paying for," Ms. Briaud says. "Now, people don't know."

Ms. Briaud acknowledges that fee-only planners, including many members of her group, have a problem of their own, but she thinks disclosure could help this one, too. Ask most fee-only planners to describe their typical clients, and the words "high net-worth individuals" are often heard. That means wealthy people or, at least, people who have enough money to give the planners enough options and generate enough fees to make it worth their time.

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