The securities industry is designed to look as if all financial advisors who sell investment products are super successful, financial majors, vice presidents, and so on. All of these things are done on purpose to make you trust them and think that they are investment gurus who will be great with your money. The reality is that this is not always the case. This is just an illusion for the industry. That’s why it’s important to ask the right questions to make sure you’re getting the right professional. The reality is that the brokerage industry, like any other industry, has good financial advisors and bad financial advisors. Here are some tips on how to make sure you’re getting good.
(1) FINRA BrokerCheck
The first tool you should use to check with your financial advisor is something called FINRA BrokerCheck. BrokerCheck is a publicly available tool. You can go to FINRA.org and in the upper right corner of this website there is something called BrokerCheck. You can literally type in a person’s name, press Enter, and you’ll get what’s called a BrokerCheck report, which will detail all the information you need when checking your financial advisor.
BrokerCheck will be able to tell you how their licensing exam adviser did, where they were hired, where they went to school, if they were ever charged with anything criminal. Have they ever declared bankruptcy? Have they ever been sued by a client? Have they ever been fired by their brokerage firm? These are all things that would be absolutely critical before you establish a relationship with someone who will manage all your life savings.
When accepting clients, the first thing we do is look for their BrokerCheck report. We start shaking all this potential customer information about their advisor and they are often amazed. We are not magicians and I do not know every financial advisor. Literally all we do is download this publicly available information and look at the report. And so many times we tell a potential client that their advisor has been sued a bunch of times and the investor had no idea.
Obviously, this would be critical information to know in the beginning when they decide whether to work with this person. If they had made this report, if they knew, for example, that the person they were considering had already been tried 26 times by former clients, they would never go with that person. So obviously the first thing you need to do is download this report.
The first good question to ask a potential broker would be “How is it compensated?” Not every financial advisor receives compensation in the same way. Some of them are offset on a commission basis, which is per transaction. Every time they make a recommendation for you and you agree, they get paid. Some of them are paid a percentage of the assets managed. If you have a million dollar portfolio and they make 1%, they will make $ 10,000 a year.
You can determine what you are looking for based on what kind of investor you are. If you are a buying and retaining investor, maybe the commission model makes sense to you because maybe you only make two or three trades a year. If you trade a lot and have a very active relationship with your advisor, perhaps the assets under the management model make more sense. But ask the question first of all so that you know that it is not ambiguous.
The second question you need to ask is “does the financial advisor have a fiduciary obligation to you.” Ask them this question, because the brokerage industry will take the position that they do not. Their obligation to you from their point of view is to make an appropriate investment recommendation. This is a much lower band because sometimes the investment may be right for you, but not necessarily in your best interest. So just ask your financial advisor, “Do you think you have a trust in me?” Let’s understand this at the beginning of the relationship to make sure you know where you stand.
Another question you need to ask is, “Who are you registered with?” Many financial advisors there are somewhat independent and they have business “like business” wherever their offices are, but they are registered to sell securities through a larger brokerage firm. Find out who this is. Do some research to make sure you are joining 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 big city. Maybe 30-40 brokers in one office. There are law enforcement people, there are supervisors, there are people for operations – all in the same localized office. In my experience, you see fewer problems in this type of situation because all the supervisors are right there.
On the other side, there is the independent model – he is an advisor in an office somewhere and their correspondence is in Kansas City, Minneapolis or St. Louis or anywhere. The supervisor comes to the office once a year and audits the books and reviews the advisor’s activities for the previous year. These visits are usually announced well in advance. Obviously, supervision in this context is very different. And this is the type of company in which we see more problems.
You want to make sure you are connecting with the right company. That the company monitors your financial advisor, protects you, and makes sure that if they do something wrong, they will catch it before it is harmful to your accounts.
Another good question to ask is, “Have you had an argument with your client?” If they say yes, ask him to explain it to you. No one is perfect and you can’t make everyone happy, so if you have a hundred customers and you’ve been in business for 10 years, you may have someone who has been upset with you at some point. But it may not rise to the level where it concerns you, but ask about it, talk about it.
Ask about their investment background and goals. Not every financial advisor does the same. You want to make sure that their goals are in line with yours and their approach is in line with yours.
Finally, you need to ask “do you have insurance?” The brokerage industry does not require brokerage firms or financial advisors to carry insurance. Many of them do, but they are not required to. Why this can be important, of course, is in this worst case scenario and you have a dispute with your advisor, you want to at least be with a financial advisor that if they go wrong, you have some protection. So ask them “do you have E&O insurance for this?” If not, it’s a red flag. Either just because of collection concerns, if you find yourself in a situation where you have to sue your advisor, or it may be a guess that they are not operating their business in the best possible way, because financial advisors certainly need to have E&O insurance.
(3) The next thing to keep in mind are potential warning signs. They can appear either at the initial meeting or just when the relationship starts:
“They’re in a hurry to make a decision.” We see this in many of our cases when they make you come to the meeting and say, “Sign here, here and here. I made an appointment in 15 minutes. If you have any questions, call me later. ” This is an obvious warning sign. This should be clear to most people. But I think a lot of people are afraid to escalate it because they think, “Well, he’s very busy.” and makes it look like it has a lot of customers and is really successful. So maybe it’s a good thing he doesn’t have time for me. No, it’s not good. Find someone who has time. Your wizard gets paid to manage your account, so get them to work for it.
“They don’t tell you what they get paid.” This is definitely a warning sign. The genesis of most securities fraud claims are commissions – advisors who push out high-commission products that benefit them to the detriment of their client. If the councilor does not disclose what these commissions are, that is a problem.
– They want to invest everything in one investment. This is a big warning sign. What is the motivation for this? Most people know that diversification is crucial to investing, so if you have an advisor who says, “Hey, let’s use this investment, it’s the best, better than anything else, we’ll put it all into it.” This is another warning sign.
“They want to meet you alone.” What would be the motivation? Say you’re elderly and want to bring your child to a support meeting and the counselor answers no … This is a warning sign, because obviously if they’re up and up, they shouldn’t have a problem with more people. who sit in the meeting, making sure they take care of you.
– If your advisor does not spend time with you (at the beginning and regularly after), asking about your actual investment needs (goals, time horizon, risk tolerance, etc.), this is a problem. Investments are not vanilla. Not every investment is perfect for everyone. Each investment depends on your specific situation. If your advisor does not ask you what your situation is – your net worth, your income, your investment goals, your investment experience, your goals, this is a huge red flag.
– If your account statements do not come directly from the brokerage firm, this is a red flag. If the statements come directly from your financial advisor and you don’t see anything there about the brokerage firm through which they are cleared, this can be a problem. This could be a financial advisor whose hidden losses or just send you statements that are not based on reality. Most brokerage firms do not allow their advisors to create monthly reports or, if required, they must first be reviewed and approved by compliance. If there is nothing in the statement that finally shows that it has been reviewed / approved / sanctioned by the broker-dealer consultant’s employer, this is a problem.
“If they ever want a check issued to them separately, that’s a problem.” Brokerage firms are set up to make sure that such things do not happen, so if your advisor does, it is most likely not approved by their firm.
– If you suffer huge losses without a reasonable explanation, obviously this is a problem. Many brokers will tell you “this is the market” or “forces beyond my control.” This 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. This is an important decision and should not be taken lightly without being informed.