How can you make sure you choose the right financial professional? It’s impossible to be absolutely certain you’ve found someone who is trustworthy and with whom you will enjoy working, but there are some steps you can take to ensure that your advisor is qualified and in good standing with industry regulators.
Finding the right advisor will require some research on your part because smart investors check the background of anyone promoting financial or investment guidance. With online databases from regulators and industry associations, you can search and read about financial professionals’ qualifications, certifications and fees, and any disciplinary actions against them.
Different types of advisors
First, it’s important to understand that there are many different types of financial professionals who call themselves advisors, but they may be paid in different ways, adhere to different standards of care and be overseen by different regulators. For instance, brokers generally work for brokerage firms and are overseen by the Financial Industry Regulatory Authority (FINRA), and investment advisors are generally overseen by the Securities and Exchange Commission (SEC) and work for registered investment advisory (RIA) firms (or are sole-practitioners).
A brokerage firm sells investment products based on a suitability standard (it can recommend products that are suitable given the client’s age, risk tolerance and other factors), in contrast to an RIA firm that must adhere to the fiduciary standard (it is required to recommend what is in the client’s best interest). But to make the matter even more complex, a financial company can also be both a brokerage and an investment advisory firm.
Meanwhile, financial planners don’t need to have specific training or certifications to call themselves planners, and they are not subject to the registration requirements for brokers and investment advisors. Financial planners don’t actually manage your money, while investment advisors or brokers directly invest your dollars in various investment vehicles such as stocks, bonds, Treasury securities and mutual funds.
When considering an advisor, you’ll want to visit the official sites provided by the regulatory bodies that oversee these professionals: FINRA’s BrokerCheck for brokers and brokerage firms, and the SEC’s Investment Adviser Public Disclosure (IAPD) database for investment advisors and RIA firms. If your advisor also has a certified financial planner designation, you should search thedirectory of the CFP Board, the association that grants and sets standards for this designation.
The first thing you are checking for at each of these three sites is whether your financial professional is even listed there. If an advisor who says he or she has a particular title or designation is not listed, that’s a red flag. You cannot legally operate as a broker or investment advisor unless you are registered with FINRA or the SEC. (Whether you must register with both depends on your business circumstances, but you must be registered with at least one.) And although financial planners don’t have registration or regulation requirements, if they use the CFP designation, they must appear in the CFP Board’s directory.
If you do not see your advisor listed in the appropriate directory, call or email the agency to find out whether the missing information is because of an administrative glitch. It’s hard to imagine that a professional would blatantly lie about his or her qualifications, but it happens. For example, I wanted to connect with a CFP professional I saw on LinkedIn. When I pulled up her profile, I saw that she hadn’t listed where she’d gone to college. CFP professionals must have college degrees. When I checked the CFP Board directory, she wasn’t listed. I called the CFP Board to confirm. It turns out she does not hold the CFP designation, but was representing herself as having earned it.
Dig into the details
Next, you can move on to the harder stuff. You should dig into the details about the advisor and the firm he or she works for. Here’s how to search these databases and what to look for:
Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website. There you can search a specific broker’s name, a firm or a ZIP code to bring up a list of local firms. If you know the broker’s name or the firm name, you can search directly by typing it in. If you want to investigate professionals in your area, you can type in your ZIP code and see a list of individuals or firms nearby.
Once you find the correct person or firm, click on the name and then look to the right to see an orange box that says “Get Details.” The page that comes up shows four icons identifying the type of firm (or advisor), any applicable regulatory or disciplinary disclosures, the firm’s inception date (or the advisor’s registration history), and registration location(s) (and the number of exams the advisor has passed).
From there, you can scroll down to an orange rectangular box that says “Download Full Report PDF.” This report provides more specific detail on the advisor and/or the firm. On this site, you will see firms listed as “Brokerage Firm” and/or “Investment Advisor Firm” and the firm’s capabilities, scope and any customer complaints against the firm. For an individual, you’ll be able to see the broker’s qualifications, registration and work history, and customer complaints.
The disclosures section of the full report will be the most helpful in evaluating brokers and firms. It provides descriptions of actions the broker or firm has taken that have resulted in complaints or criminal charges. It also shows how these complaints or other issues were resolved.
The IAPD database provides free information about investment advisor firms registered with the SEC and most state-registered investment advisor firms. As with BrokerCheck, if you know the broker’s or company’s name, you can search directly by typing it in, or you can search by ZIP code. Click on a firm or an individual’s name, then look at the tab choices on the far left. If you are looking up an individual, you’ll see “Get Details” and can click for a detailed report of the person. This report also shows the advisor’s work history, qualifications and designations, and any disclosure events.
Once you know the company that the advisor works for, choose the “Firm” box, type in the company name, and hit “Get Details.” In the tab choices that come up on the far left, you’ll see “Registration/Reporting Status,” “View Form ADV By Section” and “Part 2 Brochures.” Check out the firm’s Form ADV. This form is completed by all investment advisory firms and will tell you a lot about the company and its business practices and structure. Item No. 11, for example, is the disclosure section where you can see whether clients have lodged complaints or lawsuits against the firm.
The “Part 2 Brochures” tab is also helpful. Of particular interest is item No. 5, “Fees and Commissions.” There you can see how much the firm charges to manage your money and whether there is a minimum investment amount. Many advisors take on only clients who invest over a certain amount (like over $100,000 or more). However, other advisors have low or no minimum investment requirements.
Although there are no regulatory requirements for financial planners, the CFP Board certifies, tests and supervises financial planners who hold the CFP designation. Go to the CFP Board website to make sure your CFP professional is in fact listed. You can search for your advisor by name or input your ZIP code to find local professionals. Each person’s name and profile will come up, and you’ll be able to see whether the planner requires a minimum amount of assets. You can also use this site if you want to report your planner for unethical or fraudulent behavior.
Although it may be possible to find an excellent financial planner with no formal education or certifications, the best advice will probably come from trained financial planners such as those who hold the CFP designation. Most financial planners who are committed to offering their clients optimal service will take the time and expense to formally educate themselves and prove their knowledge by passing difficult exams.
How to decide
These tools can seem a bit overwhelming when you first start using them, but once you look at a couple of broker reports or Part 2 Brochures under an investment advisor’s Form ADV, you’ll start to see similarities and be able to make more informed decisions about who can best serve your needs. It’s time-consuming to do all this research, and in the end, you still take a risk in choosing an advisor. But at the very least, you’ll be able to spot any major issues and avoid working with an advisor with regulatory red flags.
Another easy — and important — way to check on a potential advisor is to Google the financial professional’s name. It’s unlikely that a person would continue to practice even while under sanctions or indictments, but it’s possible. A search may also reveal behaviors or actions technically unrelated to financial service but that could make you uncomfortable with that person, such as domestic violence charges or a DUI. You may also discover that the person is active politically or socially in causes different from those you support and thus might not be a good fit for you. An internet search will also turn up articles, books or advice-column answers written by the person, which can give you an idea of the kind of advice he or she provides.
After you’ve completed your research, your best bet is probably to pick the professional you like the best and with whom you feel most comfortable. You’ll be spending time together and developing a relationship, so after you verify credentials and past practices, you’ll be glad you chose the best fit with regard to personality.
Kathryn Hauer is a certified financial planner and fee-only investment advisor with Wilson David Investment Advisors in Aiken, South Carolina