A Question of Ethics

Recently I came across a situation that I thought would make a good topic of discussion, as it deals with understanding how people in our industry get paid, and also ethics.

For this story to make sense, you have to first understand how people in financial services get paid. 

The first method is under the old commission based system.  The true name for these individuals is "investment representative", although they will use many different titles.  In the old days they were just called brokers, but that name has taken on a negative connotation.  In this system, individuals are paid a comission by the company who's product they sell to you.  This product could be a mutual fund, insurance policy, or annuity.  These payment rates will all vary by product, and as you can imagine one way these companies try to attract agents is to pay a good commission rate.  You, the customer, are not paying the agent directly.  Many people critique this system, pointing out the obvious conflict of interest between client and financial products company.  The agent may be inclined to sell the products with a higher payout, while another product may be better for the client.  Interestingly enough, brokers only have to sell a product that is "suitable".  A suitable product may or may not be the best for the client- but it's ok.

The other payment arrangement a person like us who can work under is a fee arrangement, or fee based planning.  Here, advisors may charge hourly rates, a fee for a specific plan, or a fee on assets they oversee.   Here there are fewer conflicts of interest because whether the client buys fund a or fund b, the advisor is paid the same.  Here the client pays the advisor directly.

And here is where our story begins.  Let's say a financial advisor (fee based), charges a client for a financial plan (and not a small fee, like over $1000).  This advisor is free to recommend any product in the financial universe- and they still get their fee because the client is paying them for "the plan", and not selling them the fund.  But what if the advisor is also a broker? 

Do you think it is unethical for a financial advisor to charge a client for a financial plan and then have them purchase a fund that they will in turn earn a commission on by being broker?  Personally I think it is.