How to Check Out an Adviser
I am considering hiring an investment adviser to handle a portion of my portfolio. Is there a way to check on whether any complaints have been filed against the adviser?
That's a great question. Too many people take the adviser's word for it and don't check out his or her records first. In fact, a recent survey by the Financial Industry Regulatory Authority found that 65% of seniors did not check the registration status of a broker and 78% did not check a broker's background for any broken laws or violations.
FINRA also surveyed people who had identified themselves as victims of fraud, and nearly 60% of those people had hired a broker based on recommendations from family and friends. Unfortunately, you can't just trust good word of mouth -- you really need to do some research yourself.
The good news is that it's easy to check out the disciplinary history for a broker and a firm. FINRA's BrokerCheck includes professional background information for 660,000 brokers and 5,100 securities firms that are currently registered, as well as thousands of brokers and firms that had been registered in the past.
You also can check out the person with your state securities regulator. See the Contact Your Regulator map for phone numbers and Web sites.
Even if the broker hasn't violated any laws, look for other red flags, such as whether he or she has changed firms every year, recommends Mary Schapiro, CEO of FINRA.
It can be trickier, though, to check on someone who is selling a product, such as insurance and annuities. Some products, such as variable annuities, are considered by regulators to be securities and the sellers must hold a securities license. But others, such as equity-indexed annuities, are considered to be insurance. Sellers don't have to hold a securities license to sell these products but must be licensed by their state insurance department.
Check with your state insurance department to make sure the person is licensed and see if the state has taken any disciplinary actions against the salesperson. You can find links to the state insurance departments at our insurance page.
It's also a good idea to check out the person's professional designations. It's easy to verify whether a person really holds a Certified Financial Planner designation, which has rigorous education, testing and ethics requirements. Go to the Certified Financial Planner Board of Standards site to verify that the person really holds the CFP and find out if the CFP Board has taken any disciplinary action against that person.
And learn a bit more about any other designations they're touting. Some require a lot more education and training than others. A few of these designations are primarily marketing tools offered to anyone who pays a big fee and takes an easy test.
The FINRA study asked people whether they were likely to take the advice of people holding a variety of designations. The CPA and CFP ranked highest, but the "Certified Advisor for Senior Investing" -- a totally fabricated designation -- ranked higher than the Chartered Financial Analyst, which is a highly respected and challenging designation held primarily by many mutual fund managers and others who manage money. You can look up the requirements to quailfy for each designation at FINRA's Professional Designations Database.
All the research in the world, however, won't protect you from a swindler before he or she gets caught. And many victims are embarrassed and don't report the problems. Only 56% of the victims in the FINRA survey who admitted to being defrauded said that they had reported the broker or company to anyone.
So it's also important to take precautions to protect yourself -- even if the person checks out. Establish an account at an independent institution (typically a brokerage) to hold your money because some scam artists hide a swindle by issuing false account statements. Never write a check directly to an adviser -- only to the custodial institution, which must send you quarterly statements. And meet with your adviser at least once a year to review your account.
Got a question? Ask Kim at firstname.lastname@example.org.