How can you make sure you choose the right financial professional? It’s impossible to be absolutely certain you’ve found someone 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.
Different types of advisors
First, it’s important to understand that there are many different types of financial professionals, but they may be paid in different ways, adhere to different standards 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. An RIA firm must adhere to the fiduciary standard; it is required to recommend what is in the client’s best interest. Some financial companies can also be both.
Meanwhile, financial planners don’t need to have specific training or certifications, 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.
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 the directory of the CFP Board, the association that grants and sets standards for this designation.
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. And although financial planners don’t have registration 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 if there’s been an administrative glitch. It’s hard to imagine that a professional would blatantly lie about his or her qualifications, but it happens.
Dig into the details
Next, you should dig into the details about the advisor and the firm. 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. You can search a specific broker’s name, a firm or a ZIP Code.
Once you find the correct person or firm, you can click to get additional details including any regulatory or disciplinary disclosures, the firm’s inception date and the number of exams the advisor has passed.
You can also download a full report that provides more specific detail. This includes a disclosures section, which provides descriptions of actions the broker or firm has taken that have resulted in complaints or criminal charges.
The IAPD database provides free information about investment advisor firms registered with the SEC and most state-registered investment advisor firms. As with BrokerCheck, you can search individuals, firms and ZIP Codes. You can get a detailed report that shows the advisor’s work history, qualifications and designations, and any disclosure events.
Firms must also complete a Form ADV, which 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 firm must also disclose fees and commissions. You can see how much the firm charges to manage your money and whether there is a minimum investment amount.
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 listed. You’ll be able to see whether the planner requires a minimum amount of assets. You can also use this site to report 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 at first, but once you look at a couple of reports, you’ll be able to make more informed decisions. It’s time-consuming and 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 them. A search may reveal actions unrelated to financial service but that could make you uncomfortable, such as domestic violence charges or a DUI.
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, so you’ll be glad that 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, S.C. She is an advisor at NerdWallet, a personal finance site.