How to Vet Your Financial Advisor

 

It is designed to make the securities industry appear that all financial advisors selling investment products are highly successful. These things are done deliberately to make you believe they are great investment gurus. It's not always true. This is just an illusion. It's crucial to ask the right questions in order to ensure that you are getting the right professional. There are both good and bad financial advisors in the brokerage industry. This is just as true for any other industry. Here are some ways to ensure you get a great one.

(1) FINRA BrokerCheck

FINRA BrokerCheck is the first tool you should use to vet your financial advisor. It is an open-access tool. The BrokerCheck is available at FINRA.org. Simply type in the name of the person, hit enter, and you will get the BrokerCheck report. This report will provide all the information you need to vet your financial advisor.

BrokerCheck can tell you about the advisor's performance on licensing exams. It will also show where they worked, where they went to school and if they were ever charged with any criminal offenses. Are they currently bankrupt? Are they currently being sued by clients? Are they currently employed by a brokerage firm? These are the essential things to consider before you start a relationship with someone who will manage all of your life savings.

We look at the BrokerCheck report first when we meet with clients. We begin to give all of this information to potential clients about their advisor. They are often amazed. We don't have the ability to be magicians, and I don’t know all financial advisors. We are simply pulling the publicly available information and looking through the report. We tell potential clients that their advisor has been sued several times before, but the investor didn't know.

This would have been crucial information that they had to know when they decided whether to work with the person. They would not have chosen that person if they had seen that 26 people had sued them. It is obvious that pulling that report should be your first step.

(2) Questions to Ask

A potential broker should first ask "How are your compensation?" Each financial advisor is paid differently. Some advisors are paid on a per-transaction basis. They get paid for each recommendation they make to you. Some are paid a percentage from assets under management. They will make $10,000 per year if they manage a million dollars of assets.

Based on your investor type, you can decide what you want. A commission model might be right for you if you are a buy-and hold investor. You may only trade two to three times per year. The assets under management model might be more appropriate if you trade a lot and have a strong relationship with your advisor. Ask the question so you are clear and understand.

Ask the second question: "Does the financial adviser have a fiduciary obligation to you?" The brokerage industry will assume that they don’t have a fiduciary duty to you if you ask them this question. From their point of view, they have an obligation to you to recommend investments that are suitable. This is a lower standard because an investment may be right for you, but not necessarily in your best interest. Ask your financial advisor: "Do you believe that you have a fiduciary obligation to me?" Let's start by determining where we stand at the beginning.

Another question to ask is "Who are your registered with?" Many financial advisors are independent. They have a "doingbusiness as" business wherever they are located, but are licensed to sell securities through larger brokerage firms. Find out what that person is. Make sure you do your research and make sure you are dealing with a brokerage that offers the type of compliance and supervision you expect.

There are two types. The Morgan Stanley model has a central hub of brokers located in major cities. There could be as many as 30-40 brokers working in one office. There are compliance personnel, supervisors, and operations people all working in the same office. I have found that there are fewer problems when all the supervisors are present.

The independent model is on the other side. It's an advisor who works in an office somewhere and is responsible for their compliance. A supervisor visits the office once per year to audit the books and review the advisor's activities for the previous year. These visits are often announced in advance. This context has a very different supervision. This is the type of company where we see more problems.

It is important to ensure that you are only partnering with the right company. The firm will be your financial advisor and protect you. They will also make sure they catch any mistakes before they become detrimental to your accounts.

Another question you can ask is "Have there ever been a dispute between yourself and your client?" Ask them to tell you if they answered yes. There is no way to please everyone. Even if you have 100 clients, you may have had some issues with someone. It may not be to the point where it is a concern, but it's worth asking about and talking about.

Ask about their investment history and goals. Each financial advisor approaches it differently. It is important to ensure that your goals and approach are compatible with theirs.

Finally, you need to ask yourself "Do you have insurance?" Brokerage firms and financial advisors are not required to have insurance. While many of them have insurance, they are not required. This is because if you are in a worst-case scenario with your advisor and have a dispute, it can be very important to be at least with a financial advisor so that you have some protection in case they make a mistake. Ask them "Do you have E&O insurance?" This is a red flag. You might need to sue your advisor if you find yourself in a difficult situation. Or it could be because they aren't operating their business in a professional manner. Financial advisors should have E&O coverage.

(3) Next, consider possible warning signs. These signs can be present at the beginning of a relationship or in the first meeting.

They pressure you into making a decision. This is a common problem in many of our cases. They will have you sign here, here, and here. You can make an appointment within 15 minutes. Call me if you have any questions. This is a clear warning sign. This should be obvious to everyone. However, I believe that many people fear to escalate the situation because they feel "Oh, well, he's busy." He makes it appear that he has a lot of clients and is very successful. Maybe it's okay for him to not have the time for me. It's not okay. You need someone who is willing to put in the effort. Make sure your advisor works hard to manage your account.

- They won't tell what they are being paid. This is a red flag. Most securities fraud claims stem from commissions. Advisors push high-commission products to their clients at great expense. It's a problem if the advisor doesn't disclose what these commissions are.

They are looking to invest all of their money in one place. This is a warning sign. Why would you do that? Diversification is crucial when investing. If you have an advisor saying "Hey, let’s use this investment. It's the best. It's better than any other," then it is likely that they are going to invest everything. This is another warning sign.

- They would like to be alone with you. What is the motivation? Let's say you're an elderly parent and want to bring your child to a support meeting. Your advisor tells you no. This is a warning sign. They should not have any problems with other people attending the meeting.

- Your advisor should not spend any time with you at the beginning or regularly thereafter, asking about your investment goals, time horizon, risk tolerance, etc. That's a problem. Investments aren't always easy. Each investment is not right for everyone. Every investment is different depending on your individual situation. Your advisor should not ask you about your financial situation - your net worth and income, investment goals, investment experience, and your goals.

If your account statements are not coming directly from the brokerage company, it's a red flag. If your statements come directly from your financial adviser and you don't see any information about the brokerage company they cleared through, this could be a problem. This could indicate that your financial advisor is hiding losses or sending statements that aren't based on truth. Many brokerage firms won't allow their advisors create monthly reports. Compliance must first approve them. 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.

- They should not ask for a check made out to themselves individually. Brokerage firms exist to ensure that this kind of stuff does not happen. If your advisor is doing it then it is very likely that they have not approved the request.

- You should not suffer large losses without any explanation. Many brokers will tell clients that it's the market or forces beyond my control. It may be true, but it is important to discuss the matter and get an honest explanation.

Here are some tips to help you choose the right financial advisor. This is an important decision that should not be taken lightly.