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How to Examine Your Financial Advisor

The securities industry is set up to make it appear that all financial advisers selling investment products are super successful, specializing in finance, vice presidents, etc. All of these things are done intentionally so that you trust them and think they are investment gurus who will be great for your money. The reality is that this is not always the case. That’s just the illusion of the industry. Therefore, it is important to ask the right questions to ensure that you are hiring the right professional. The reality is that the brokerage industry, just like any other industry, has good financial advisers and bad financial advisers. Here are some tips on how to make sure you get a good one.

(1) FINRA BrokerCheck

The first tool you should use to vet your financial advisor is something called FINRA BrokerCheck. BrokerCheck is a publicly available tool. You can go to and in the upper right corner of that website there is something called BrokerCheck. You can literally type in a person’s name, press Enter, and you’ll get what’s called the BrokerCheck report, which will detail all the information you need when you’re researching your financial advisor.

BrokerCheck will be able to tell you how the advisor fared on your licensing exams, where you have been employed, where you went to school, if you have ever been charged with anything criminal. Have you ever filed for bankruptcy? Have you ever been sued by a client? Have you ever been fired by your brokerage firm? These are all things that would be absolutely critical before establishing a relationship with someone who is going to manage your life savings.

During client intake, the first thing we do is look up your BrokerCheck report. We start reciting all this information to the potential client about their advisor and they are often surprised. We are not magicians and I do not know all financial advisers. Literally all we are doing is pulling this publicly available information and looking at the report. And many times we tell a potential client that their advisor has already been sued a lot of times and that the investor had no idea.

Obviously, that would have been critical information to know at the beginning when deciding whether to work with that person. If they had pulled out 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 to that person. So obviously the first thing you need to do is generate that report.

(2) Questions to ask

The first good question to ask a potential broker would be “How do you get compensated?” Not all financial advisers receive the same compensation. Some of them are compensated by commission, which is per transaction. Every time they make a recommendation and you agree, they get paid. Some of them are paid a percentage of the 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 the type of investor you are. If you are a buy and hold investor, perhaps a commission model makes sense to you because you may only be doing two or three trades a year. If you are trading a lot and have a very active relationship with your advisor, perhaps the asset under management model makes more sense. But ask the question first of all so that you know and not be ambiguous.

The second question 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 is appropriate. That’s a much lower bar because sometimes an investment might be right for you, but not necessarily in your best interests. So ask your financial advisor, “Do you feel you have a fiduciary duty to me?” Let’s work this out early in the relationship to make sure you know where you stand.

Another question to ask is: “Who are you registered with?” Many financial advisers are independent and have a “do business as” business, wherever their offices are, but are registered to sell securities through a larger brokerage firm. Find out who it is. Do some research to make sure you are getting involved with a brokerage firm that has the types of oversight and compliance you would expect.

There are two types of brokerage firms. There is the Morgan Stanley model where they have a broker center in a major city. Maybe 30-40 brokers in an office. There are compliance people, supervisors, operations people, all in the same localized office. In my experience, you see less of a problem in that kind of situation because all the supervisors are there.

On the other hand, there is the freelance model: You are an advisor in an office somewhere and your fulfillment 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 during the previous year. These visits are usually announced well in advance. Obviously, supervision in that context is very different. And that’s the type of firm where we see the most problems.

You want to make sure you get involved with the right company. That the company is monitoring their financial advisor, protecting them, making sure that if they are doing something wrong, they catch it before it is detrimental to their accounts.

Another good question to ask is, “Have you ever had a dispute with your customer?” If they say yes, ask them to explain. No one is perfect and you can’t keep everyone happy, so if you have a hundred clients and you’ve been in business for 10 years, you might at some point have someone who’s mad at you. But it may not get to the level you are concerned about, but ask, talk about it.

Ask about their investment history and goals. Not all financial advisers do it the same way. You want to make sure your goals are consistent with yours and that your approach is consistent with yours.

And finally you should ask “do you have insurance?” The brokerage industry does not require brokerage firms or financial advisers to carry insurance. Many of them do, but are not required to. Why that can be significant, of course, is worst-case scenario and you have a dispute with your advisor, at least you want to be with a financial advisor who, if you screw it up, has some protection. So ask them “do you have E&O insurance for this?” If not, it is a red flag. Either because of collection concerns if you find yourself in a situation where you need to sue your advisor or it could be a suggestion that they are not operating their business in the best possible way because certainly financial advisers must have E&O insurance.

(3) The next thing to consider are possible warning signs. These can appear in the initial meeting or right when the relationship begins:

– They rush you to make a decision. We see this in a lot of our cases where they make you come to the meeting and say, “Sign here, here and here. I have an appointment in 15 minutes. If you have any questions, please call me later.” That is an obvious warning sign. That should be clear to most people. But I think a lot of people are afraid to step it up because they think, “Well, he’s very busy.” and it makes it look like it has tons of clients and is really successful. So maybe it’s okay that I don’t have time for myself. No, it’s not okay. Find someone who has time. Your advisor is paid to manage your account, so make them work for it.

– They don’t tell you what they get paid. It is definitely a warning sign. The genesis of most securities fraud claims are commissions – advisers promoting high-commission products that benefit them to the detriment of their clients. If the advisor doesn’t disclose what those fees are, that’s a problem.

– They want to put everything in one investment. This is a great warning sign. What is the motivation to do that? Most people know that diversification is critical when investing, so if you have an advisor who says, “Hey, let’s use this investment, it’s the best, it’s better than anything else, we’re going to put everything into this” . That’s another warning sign.

– They want to meet you alone. What would be the motivation? Let’s say you’re older and you want to take your child to a meeting for support and your advisor says no … That’s a warning sign because obviously if they’re getting better, they shouldn’t have a problem with more people sitting down. at the meeting, making sure you are attended to.

– If your advisor does not spend time with you (at first and then regularly) asking about your real investment needs (goals, time horizon, risk tolerance, etc.), that is a problem. Investments are not vanilla. Every investment is not perfect for everyone. Each investment depends on your particular situation. If your advisor doesn’t ask you what your situation is – your net worth, your income, your investment goals, your investment experience, your goals – that’s a big red flag.

– If your account statements do not come directly from the brokerage firm, that is a red flag. If the statements are coming directly from your financial advisor and you don’t see anything there about the brokerage firm through which they settle, that can be a problem. That could be a financial advisor hiding losses or just sending you statements that are not based on reality. Most brokerage firms do not allow their advisers to create monthly reports or, if they do, require that they first be reviewed and approved by the compliance department. If there is nothing in the statement that definitively shows that it has been reviewed / approved / sanctioned by the advisors, the stockbroker and the employer, it is a problem.

– If you ever ask to have a check written to you individually, that’s a problem. Brokerage firms are set up to make sure that sort of thing doesn’t happen, and so if your advisor is doing it, chances are they haven’t been approved by your firm.

– If you suffer large losses without a reasonable explanation, obviously that is a problem. Many brokers will tell you “it’s the market” or “forces that are beyond my control”. That may be true, but you want to talk about it and make sure you get a reasonable explanation.

Here are some tips on how to choose the right financial advisor. It is an important decision and should not be made lightly and without being informed.

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