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Soft Money/Financial Security as a Kickback

When Does Financial Support Become a Kickback?

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?

Solution Preview

1. What facts do you need to know to better judge this situation?

To better judge this situation, we would need to determine the extent of the work done by the financial advisor for research and analysis services, and if the payments were relative to the value of the research services provided. Without knowing if the amounts were even comparable in value to the services provided, it is impossible to draw conclusions based on the facts given in the case. The fact that advisors were paid in the form of travel, vacations, automobile expenses, and other personal and business expenses is not as relevant as the amounts paid in value to the services and analysis provided, which would be measured in both time, and the value of the advice and recommendations provided from the advisor, based on the research and analysis that ...

Solution Summary

This solution provides a detailed discussion examining the question of whether if soft money payments are considered kickbacks as well as the ethics and consequences should that be true. 542 words.