Consider the case of what is referred to as soft money within the securities ind
ID: 451159 • Letter: C
Question
Consider the case of what is referred to as soft money within the securities industry. According to critics, a common practice in the securities industry amounts to little more than institutionalized kickbacks. "Soft Money" payments occur when financial advisor receive payments from a brokerage firm to pay for research and analyst services that, in theory should be used to benefit the clients of those advisors. Such payments can benefit clients if the advisor used them to improve the advice offered to the client. Conflicts of interest can arise when the money is used for the personal benefit of the advisor.
In 1998 the Securities and Exchange Commission released a report that showed extensive abuse of soft money. Examples included payments used for office rent and equipment, personal travel and vacations, memberships at private clubs, and automobile expenses. If you learned that your financial advisor received such benefits from a brokerage, could you continue to trust the financial advisor's integrity or professional judgment?
1. What facts do you need to know to better judge this situation?
2. What values are at stake in this situation? Who get harmed if a financial advisor accepts payments form a brokerage? What are the consequences?
3. Does accepting these soft money payments violate any individual's rights? What would be the consequence if this practice were allowed and became common place?
Explanation / Answer
1. The facts needed to judge the situation are:-
a. We should check the previous records of the financial advisor in the firms.
b. The soft money offered by client. If it’s more than nominal then it is matter of suspicion.
c. The financial advisor should be interrogated about this matter and then one should take decision.
2. The integrity of financial advisor is on stake. In this case if the financial advisor accepts payment then the firm then its client will be harmed as some biasness will occur in making decision.
The financial advisor will give some biased advice about the brokerage firm as he is receiving some soft money from the firm. This can result in poor advice and loss of business.
3. Yes, accepting these soft money payments violate any individual's rights because he is already getting money for his work from the client and accepting money from the other party will increase the chance of conflict of interest.
The practice of soft money is allowed and became common place the integrity of financial advisor will decrease. The firms will not accept the decision given by such firms and every decision made by them will be questioned and it will be not widely accepted as people will have doubt that decision is made due to soft money.