(1) FINRA BrokerCheck
The first tool that you should be using to vet your financial advisor is something called FINRA BrokerCheck. BrokerCheck it is a publicly available tool. You can go to FINRA.org and at the top right-hand corner of that website there’s something called the BrokerCheck. You can literally type in a person’s name, hit enter and you’re going to get what’s called the BrokerCheck report which will detail all the information that you need when you’re vetting your financial advisor.
BrokerCheck will be able to tell you how the advisor did on their licensing exams, where they have been employed, where they went to school, if they’ve ever been charged with anything criminally. Have they ever declared bankruptcy? Have they ever been sued by a client? Have they ever been fired by their brokerage firm? These are all the things that would be absolutely critical before establishing a relationship with somebody who’s going to manage your entire life savings.
During client intake the first thing we do is look up their BrokerCheck report. We start rattling off all this information to the potential client about their advisor and they are often amazed. We aren’t magicians and I don’t know every financial advisor. Literally all we are doing is pulling this publicly available information and looking at the report. And so many times we are telling a potential client that their advisor has been sued a bunch of times already and the investor had no idea.
Obviously that would have been critical information to know at the beginning when they were deciding whether to work with that person. If they had pulled that report, if they knew for example that the person they were considering had already been sued 26 times by former clients, they would never go with that person. So obviously, the first thing that you should do, pull that report.
(2) Questions to Ask
The first good question to ask a potential broker would be “How are you compensated?” Not every financial advisor is compensated the same way. Some of them are compensated on a commission basis, which is per transaction. Every time they make a recommendation for you and you agree, they get paid. Some of them are being paid a percentage of assets under management. If you have a million-dollar portfolio and they make 1%, they are going to make $10,000 a year.
You can determine what you are looking for based on what kind of investor you are. If you’re a buy-and-hold investor, maybe a commission model makes sense for you because maybe you’re only doing two or three trades a year. If you’re trading a lot and you’re having a very active relationship with your advisor maybe the assets under management model makes more sense. But ask the question first and foremost so that you know and it’s not ambiguous.
The second question to ask is “does the financial advisor have a fiduciary duty to you.” Ask them that exact question because the brokerage industry will take the position that they don’t. Their obligation to you from their perspective is to make an investment recommendation that’s suitable. That’s a much lower bar because sometimes an investment could be suitable for you but not necessarily in your best interests. So just ask your financial advisor, “Do you consider yourself to have a fiduciary duty to me?” Let’s figure this out at the beginning of the relationship to make sure you know where you stand.
Another question you should ask is, “Who are you registered with?” A lot of financial advisors out there are sort of independent and they’ve got a “doing business as” business, wherever their offices are, but they are registered to sell securities through a larger brokerage firm. Find out who that is. Do some research to make sure that you’re getting involved with a brokerage firm that has the types of supervision and compliance that you would expect.
There are two types of brokerage firms. There is the Morgan Stanley model where they have a hub of brokers in a major city. Maybe 30-40 brokers in one office. There are compliance people, there are supervisors, there are operations people – all in the same localized office. In my experience you see less problems in that type of situation because all the supervisory people are right there.
On the flipside, there is the independent model – it’s an advisor in an office someplace and their compliance is in Kansas City or Minneapolis or St. Louis or wherever. The supervisor comes to the office once a year and audits the books and reviews the activities of the advisor for the prior year. These visits are usually announced well in advance. Obviously the supervision in that context is very different. And that is the type of firm where we see more problems.
You want to make sure you’re getting involved with the right firm. That the firm is overseeing your financial advisor, protecting you, making sure that if they are doing something wrong, they will catch it before it’s detrimental to your accounts.
Another good question to ask, “Have you ever had a dispute with your client?” If they say yes, ask him to explain it to you. Nobody is perfect and you can’t keep everyone happy so if you’ve got a hundred clients and you have been in the business for 10 years you might have somebody who’s been upset with you at some point. But it may not rise to the level where it concerns you, but ask about it, talk about it.
Ask about their investment background and their objectives. Not every financial advisor does it the same way. You want to make sure that their goals are consistent with yours and their approach is consistent with yours.
And finally you should ask “do you have insurance?” The brokerage industry does not require brokerage firms or financial advisors to carry insurance. Many of them do but they are not required to do so. Why that can be significant, of course, is in that worst-case scenario and you have a dispute with your advisor, you want to at least be with a financial advisor that if they do screw up you’ve got some protection. So ask them “do you have E&O insurance for this?” If not, that is a red flag. Either just because of collectability concerns if you get into a situation where you need to sue your advisor or it might be a suggestion that they are not operating their business in the best way possible because certainly financial advisors should have E&O insurance.
(3) The next thing to consider are potential warning signs. These can appear either in the initial meeting or just as the relationship begins:
– They rush you to make a decision. We see this in a lot of our cases where they have you come in the meeting and say, “Sign here, here and here. I’ve got an appointment in 15 minutes. If you have any questions call me later.” That’s an obvious warning sign. That should be clear to most people. But I think a lot of people are afraid to escalate it because they think, “Oh well, he’s very busy.” and he makes it seem like he’s got tons of clients and he’s really successful. So maybe it’s okay that he doesn’t have time for me. No, it’s not okay. Find someone who has the time. Your advisor is getting paid to manage your account so make them work for it.
– They don’t tell you what they’re being paid. That’s definitely a warning sign. The genesis of most securities fraud claims is commissions – advisors pushing high commission products that benefit them at the detriment of their client. If the advisor is not disclosing what those commissions are, that’s a problem.
– They want to put everything into one investment. This is a big warning sign. What’s the motivation in doing that? Most people know diversification is critical when investing so if you have an advisor who is saying, “Hey, let’s use this investment, it’s the best, it’s better than anything else, we’re going to put everything in this.” That’s another warning sign.
– They want to meet with you alone. What would be the motivation? Say you are elderly and you want to bring your kid to a meeting for support and your advisor says no… That’s a warning sign because obviously if they’re on the up and up they shouldn’t have any problem with more people sitting in the meeting, making sure that you’re being taken care of.
– If your advisor does not spend time with you (at the beginning and regularly thereafter) asking about your actual investment needs (goals, time horizon, risk tolerance, etc.), that’s a problem. Investments are not vanilla. Every investment is not perfect for every person. Each investment depends on your particular situation. If your advisor is not asking you what your situation is – your net worth, your income, your investment objectives, your investment experience, your goals, that’s a huge red flag.
– If your account statements do not come directly from the brokerage firm, that’s a red flag. If the statements are coming directly from your financial advisor and you’re not seeing anything on there about the brokerage firm they clear through, that can be a problem. That could be a financial advisor whose hiding losses or just sending you statements that are not based on reality. Most brokerage firms do not permit their advisors to create monthly reports or if they do they require that they first be reviewed and approved by compliance. If there is nothing on the statement that definitively shows that it has been reviewed/approved/sanctioned by the advisors broker-dealer employer, it’s a problem.
– If they ever ask for a check to be made out to them individually that’s a problem. Brokerage firms are established to make sure that kind of stuff doesn’t happen and so if your advisor is doing it, very likely this has not been approved by their firm.
– If you suffer huge losses without any reasonable explanation, obviously that’s a problem. Lots of brokers will tell you “it’s the market” or “forces that are out of my control.” That may be true but you want to talk about it and make sure that you get a reasonable explanation.
These are a few tips on how to pick the right financial advisor. It is an important decision, and should not be made lightly and without being informed.
This information is provided by Daxton White, the Managing Partner of The White Law Group. The White Law Group is a national securities fraud, securities arbitration, investor protection and securities regulatory/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida. The firm’s attorneys have handled over 600 FINRA arbitration claims and recovered over $20,000,000 on behalf of investors.
If you have suffered losses at the hands of your financial advisor, the attorneys at The White Law Group may be able to help you recover your losses. For a free consultation with a securities attorney, please call 888-637-5510 or visit us on the web at http://www.whitesecuritieslaw.com.
Author: D. Daxton White