How to Check Out a Broker or Financial Advisor

Posted on April 10, 2019 at 11:36 AM PST by

It happens every few months. News breaks of a stock broker or financial advisor accused of bilking clients, taking money or otherwise being slippery with other people’s money.

It’s important to remember that there are tens of thousands of people in the money management business, and that the vast majority are closely watched by superiors and regulators. And, frankly, the vast majority are honest, hardworking folks.

Knowing that doesn’t help much if you’re the one who gets taken by a scam artist. So how can you protect yourself?

If you have savings in a bank, say, in a savings account or a certificate of deposit, it’s backed by the Federal Deposit Insurance  Commission (FDIC) up to $250,000 per account in insured member banks.

If you use a credit union there’s the National Credit Union Administration (NCUA), which provides similar protection to depositors.

What these agencies do is protect your money from the collapse of a bank for whatever reason. Their job is to inspire confidence in savers.

Another organization, the Securities Investor Protection Corporation (SIPC), exists to protect investors up to $500,000 (of which $250,000 can be cash) from the loss of securities or cash if a brokerage fails.

Importantly, they do not protect investors from bad advice or a decline in investment value. If you buy stock and it goes missing at the brokerage, SIPC steps in. If it simply crashes to zero, that’s not covered.

If you are considering hiring a broker or financial advisor, it’s a good idea to check out their disciplinary record online.

The first place to look is FINRA’s background-checking service, BrokerCheck. You can search by the name of the advisor or the firm.

You’ll find there any “disclosures” required by the not-for-profit private regulator, such as fines and complaints from past clients. Or, you’ll find none, a clean record.

You’ll also see any and all licensing exams the advisor has to his or her name and a history of past firms where the advisor has been registered.

Good faith

Another resource is the U.S. Securities and Exchange Commission Investment Advisor Public Disclosure (IAPD) report. This is also searchable by name of advisor or name of firm.

It’s also a good idea to look up a company’s Form ADV at the SEC site. This is a detailed form that breaks down how a financial advisor is structured as a company, how it charges fees, how much money it manages, number of clients and many other details.

Financial advisors are required to provide the form to any potential client who asks. It should be written in plain English and be easy to understand by a layperson seeking to hire an advisor.

The advisor you are considering might offer you a nicely printed version of their SEC form, but it should contain the same information, just in a friendly, easy-reading format.

Probably the most important information on a Form ADV is how the advisor is compensated for their work. Some charge annualized fees based on how much money you invest with them. Some are primarily planners who charge an hourly fee. Some do both

Still others, such as stock brokers, get compensation from the sellers of products they might counsel you to buy. There’s nothing terribly wrong about that — so long as it’s clearly disclosed and you understand the advisor’s financial motivations.

All this being said, there’s really nothing that will protect you from a bad apple with no previous disclosures or complaints.

If you are wary, avoid giving a new broker or advisor immediate discretion over your accounts, and always watch your accounts closely to be sure that your orders are being executive in good faith and as you intended.

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