How might an investor protect him- or herself from what happened to Sue and her nephew?

Sue had been hoping to get into investing for some time, but she simply didn’t know how to get started. Her nephew had recommended that she visit his financial planner, and today she had her first appointment. She arrived fifteen minutes early and was shown into a spacious and classy waiting area. The receptionist offered her a choice of beverages and soon returned with a steaming cup of tea. Although initially nervous about turning over her investment decisions to a stranger, Sue was feeling more confident by the minute. After a short wait, a tailored, middle-aged woman arrived to show Sue into an office bright with sunshine. Coming from behind the desk was a young man who promptly introduced himself as Dave. Sue was taken aback by his youth and casual attitude, but she had heard great things about this man from her nephew. As they settled themselves, Dave asked Sue about her investment wishes. He listened intently and immediately began to recommend a number of mutual funds and other investment opportunities. He also suggested that she conduct the majority of her investment activity online at his direction. Dave was friendly and attentive, and Sue found herself being swept up by his presentation. He seemed so confident about the earning potential of these investments that Sue agreed readily to his suggestions. Some weeks later, after seeing some initial returns on her investments, Sue began to lose money. Not knowing what to think, she called her nephew to get his opinion. He was experiencing the same run of bad luck. After digging for information from his friends in the financial industry, Sue’s nephew discovered that Dave was known for recommending mutual funds for which he received extra payments from the fund firms themselves, regardless of the viability of the funds. Fortunately, Sue and her nephew were able to retrieve some of their money, and both considered that they had learned a valuable lesson.

1. Define the ethical issue presented in this case.

2. Should promoting funds to receive extra payments be legal?

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3. How might an investor protect him- or herself from what happened to Sue and her nephew?

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