by Jack Waymire
Financial advisor research may be one of the most important things you do.
Think about it: Before buying a car, people typically research makes, models and even dealerships before making a purchase. And that’s for a car! The financial advisor you choose effects whether you get to live the retirement you plan for, how you live that phase of life and what, if anything, you are able to leave behind.
With that said, your objectivity is very important in the researching process. Too many investors rely on their intuition when they select financial advisors. What they fail to realize is intuition/emotions/feelings are easy to manipulate by advisors with superior sales skills. An intuitive selection process can cause you to select the advisor with the best personality and sales skills and not their experience or expertise.
It is very risky to select advisors based on feelings. Your selection process should be driven by facts and objectivity.
So, where do you go to research financial advisors?
The Internet gives you access to vast amounts of information about financial advisors, but you do not want to spend hours seeking and reviewing information. You need an efficient way to research an advisor in 30 minutes or less.
Here are 5 places you should always look:
- Regulatory websites
- Financial advisor websites
- The Better Business Bureau (BBB)
- Social Media
Let’s break these down:
1. Regulatory Websites
Never select a financial advisor without reviewing his or her compliance record. And if you find complaints on that record, you may want to move on. Why interview advisors with disclosures if you can interview advisors with clean records?
You can read the description of the complaint and its resolution. Some people believe 80 percent of all complaints are frivolous; investors often file complaints when they lose money in the stock market. You can separate the frivolous from the serious by reviewing the resolution. In most cases, frivolous complaints are denied in arbitrations.
Regulatory websites also provide information on advisors’ work experience, the type of registrations they hold and other vital information.
Here are the top stops:
Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that is financed by Wall Street. Because of this, FINRA is not as investor-friendly as it should be, but it is your best source for viewing the compliance records of firms (3,800) and professionals (634,000) who sell investment products for commission.
FINRA was authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.
BrokerCheck is a FINRA service that enables you to review the compliance records of broker-dealer firms and registered representatives. It maintains records for firms and professionals who hold active securities licenses. It maintains records for two years for firms and professionals who drop their licenses and it maintains records in perpetuity for firms and professionals who have complaints on their records.
You will also find additional information in BrokerCheck that you can use to validate some of the advisor’s claims. For example, years of experience, employment history and licensing.
Whereas FINRA regulates broker-dealers, the Securities and Exchange Commission (SEC) is a government agency that regulates and oversees Registered Investment Advisors (RIAs) with more than $100 million in assets under management.
When financial advisory firms register with the SEC, they must complete a Form ADV that is as close as you will get to full disclosure for their businesses. Disclosures on Form ADV include ownership, business practices, disciplinary history, financial information, investment processes and other pertinent information that must be updated annually.
For investors, ADVs can be a treasure trove of information that can be used to learn what they need to know about firms and their advisors. The amount of information can be overwhelming; however, if you know what to look for, the form is a very useful research tool.
Form ADV has two parts: Part 1 provides the essential data about a firm, including the number of clients, owners and advisors, state registrations, disciplinary information, etc. Part 2 is more of a narrative that describes the education and backgrounds of advisors, the types of services offered, fees, compensation arrangements and their methods for selecting investments for clients.
State Securities Commissioner
Smaller RIAs with assets under $100 million are required to register with their state securities commissioners. You can find out how to contact your state’s commissioner by going to the North American Securities Administrators Association (NASAA) website. Click on the “Contact Your Regulator” navigation tab to find a list of state regulators with their contact information or you can click on the name of your state to be taken to the website of the regulatory agency.
A high percentage of the advisor information that is maintained by states is not available online. Contact your state’s securities commissioner to find out how to access advisor information.
State Insurance Commissioner
Most financial advisors provide planning and investment services. A significant percentage of these professionals also have licenses that permit them to sell several types of insurance products, such as annuities, life, disability, health and long-term care insurance. A very small percentage are licensed to sell casualty insurance products.
The state that issued the license will have a record of the advisor’s licensing and compliance record. This data will vary by state. Some of the state websites include an agent search application, enabling you to search by name. Go to your state’s insurance department or commission to obtain the information you are seeking. You can also go to the National Association of Insurance Commissioners (NAIC) website and use their directory to find your state’s insurance commissioner.
Again, a high percentage of the advisor information that is maintained by states is not available online. Contact your state’s insurance commissioner to find out how to access advisor information.
2. Financial Advisor Websites
Every financial advisor in America has a website – or they should. It may be their own website or they may have a biographical page on an employer’s website. Some financial advisors, in particular more junior advisors, may not be represented on their firms’ websites.
In many respects, financial advisor websites act like online sales brochures (i.e., Who We Are, What We do, Who We Serve and Contact Us), which means most of the content on the site is more or less promotional. But you can find out what services an advisor specializes in and usually how long they have been practicing. You will also more than likely find their credentials, which you can later verify.
High-quality advisors use their websites to practice transparency. They can afford to be transparent because they have nothing to hide. You will begin to recognize who is transparent and who is not after visiting a few advisor websites.
Be sure to view the information at the bottom of the home page. It will tell you who the advisor or firm is affiliated with. For example, you might see, “Securities offered through XYZ Financial, Member FINRA/SIPC.” This tells you the advisory firm is licensed with a broker-dealer, which also means they sell investment products for commissions. If the advisor is an RIA, you will typically see: “XYZ Financial, a Registered Investment Advisor.” Many RIAs include a link to their Form ADV.
3. Better Business Bureau
The Better Business Bureau (BBB) is one of the most recognized brands in America. It has provided services to consumers for more than 100 years. It has always been a go-to resource for researching the quality of businesses and professionals and it should be a part of your financial advisor research process.
Utilizing information obtained from public data sources as well as the businesses themselves, BBB rates businesses based on how they are to interact with their customers, assigning a quality rating from A+ (highest) to F (lowest).
The rating elements include a business’s complaint history, response record, time in business, transparency of business practices, licensing and government actions and truth in advertising. Although BBB ratings are not a guarantee of a business’s reliability or performance, the information it gathers to develop business profiles can be helpful in evaluating the quality of financial firms and professionals.
With Google, you should look for any information that validates or invalidates the claims of financial advisors or information that would cause you to include or exclude an advisor from the next step of your selection process.
This may be information that appears in a regulatory database. For example, you might find a negative article written about a financial advisor in your local newspaper. Conversely, you might find that the advisor has several great reviews. The information can be positive or negative.
Your Internet research should be conducted on the advisor and the advisor’s firm. If the firm is privately held, you may want to research the names of the owners of the firm.
5. Social Media
Please note: We do not recommend using personal social media accounts for any type of profiling based on race, religion, age or political affiliations. But you can use business social media accounts to learn more about advisors or firms before you select them.
Not all financial advisors use social media for their business. In fact, those who work for broker-dealers or securities firms are limited by compliance rules in how they can use social sites. But you can actually learn a lot about financial advisors by visiting their social media pages. Facebook, LinkedIn, Instagram and Twitter are among the more widely used social media platforms and they can provide information about the advisor’s knowledge and credibility. The number of social media sites continues to grow, but we recommend you concentrate on the more popular sites, which are more likely to be used by financial advisors.
The Invisible Advisor
If your financial advisor research does not turn up any information about a particular advisor, this should be grounds for automatic exclusion. You do not have to know why there is no information. All you have to know is the lack of information creates a hidden risk and you can avoid this risk by excluding the advisors from your selection process.
In extreme cases, criminals and others pose as financial advisors to gain control of your assets. They may even steal the identity of legitimate advisors. This is one of the reasons why you should cross-check the information you find on multiple websites and the Internet.
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