Most financial advisers act with honesty and integrity. While their investment philosophies may vary, the vast majority of them will be responsible stewards of your financial assets.
Still, it’s your job to vet an adviser before signing on. Fortunately, the process is relatively painless. Start by entering an adviser’s name into BrokerCheck, a free online tool provided by FINRA, a private, non-governmental group that develops and enforces rules and standards for broker-dealers.
BrokerCheck summarizes an adviser’s experience, employment history, exams passed (such as Series 7, a test that registered representatives must pass to sell securities) and state licenses. It also cites the number of “disclosures” — disciplinary events — based on data provided by advisory firms, the U.S. Securities and Exchange Commission, and other regulators.
Many advisers have no disclosures and a stable work history. Others require a bit more digging. Each disclosure includes a description (such as “customer dispute” or “employment separation after allegations”) along with the outcome (such as “denied”, “settled” or “closed — no action”).
Over a long career, some advisers wind up with one or more disclosures on their record. Don’t cast these financial professionals aside just yet. “Some disclosures can be technical with no customer harm,” said Gerri Walsh, FINRA’s senior vice president of investor education. “Other disclosures can be ruled in favor of the broker. But if the disclosures involve lots of customer complaints, you may want to think twice” about that adviser.
If you’re curious about an adviser’s colleagues, enter their names into BrokerCheck as well. That way, you can assess a firm’s roster of financial planners to determine if they all pass muster. This is important because you may wind up working with more than one adviser at a firm.
Some of the most serious red flags relate to a FINRA suspension of a broker’s license, a fine, or other disciplinary action. Also investigate any instances where an adviser was terminated from his or her job.
“Check if they were terminated for cause,” said Jack Waymire, founder of Paladin Research & Registry, which offers a free online tool to screen advisers. “BrokerCheck gives the reason for termination and gives the adviser a chance to respond.”
Waymire cautions consumers to assess an adviser’s background as well. Someone who jumps from firm to firm every two years or so may raise concern. “You don’t job-hop if your business is growing,” he said.
For additional vetting, Waymire suggests entering an adviser’s name into an internet search engine along with “fraud” or “lawsuit.” You can also study an adviser’s Form ADV, a comprehensive disclosure document that you should review before committing to a relationship.
While an individual can set up shop as a “financial planner” free from certain requirements, certified financial planners (CFPs) must pass an exam and meet other prerequisites. To confirm an adviser’s status as a certified financial planner, visit the CFP Board website. You’ll also learn if that adviser has been disciplined publicly by CFP Board or submitted a bankruptcy filing within the past 10 years.