How well do you know your investment advisor?

Nobody wants to think that their investment advisor may have unscrupulous intentions but it’s important to ask yourself this question. For the casual investor, maybe your investment advisor was referred by a friend or maybe they are the same advisor who manages a family member’s portfolio. Often, we rely solely on the recommendation of someone close to us when choosing a financial professional. Choosing an investment advisor without doing your own due diligence on their background and credentials may result in serious consequences down the road.

Misconduct & Fraud

Even a professional registered with a reputable firm does not mean they are clear of any past misconduct. The Securities and Exchange Commission (SEC) regularly brings charges against firms for the actions of their registered advisors and broker-dealers. Recently, the SEC settled charges with Ameriprise Finacial Services for their failure to protect investors from alleged fraud and misconduct perpetrated by representatives of the firm. According to the complaint, five registered agents of the brokerage and advisory firm defrauded investors out of more than $1 million. There are other instances of firms using inaccurate information to solicit investors. The SEC has a running list of firms and entities purporting to be associated and or registered with reputable firms or regulatory agencies. These individuals and entities may use similar sounding names or claim vague connections to existing firms and agencies.

Check the Background of Your Investment Advisor

If you feel uncomfortable prying into the background and experience of your investment advisor, don’t be. Don’t allow your advisor’s status as a financial professional to intimidate you from asking questions. It would be the same as if you were selecting a medical professional – or a legal professional for that matter; you wouldn’t just take anyone with a degree. You want to make sure they have a proven track record of taking care of their clients and patients. In other words, it’s not just the practical knowledge and insight you want out, but the personal care and attention. Your investment advisor should be ensuring the welfare of your investments, not using their position to leverage their own gains. Before entrusting your financial future an investment advisor, it’s a good idea to know if they have any of the following:

• Disciplinary actions by a government regulator (including the SEC) or a self-regulatory organization (including FINRA);
• A history of customer complaints;
• Lawsuits or arbitration claims brought by customers; and
• Employment with one or more firms that have been expelled from the securities industry.

Ideally, you should ascertain this information prior to signing any service contracts or agreements, but it’s never to late to find out. If you’ve been with your advisor for a long time and never thought to ask their background, you should have enough of a rapport with them to be able to broach the topic in a tactful manner.

Choosing an Advisor: Tips for Due Diligence

Here are some common questions you should be asking potential investment advisors:

• What’s your background and experience?

  • What experience do you have handling portfolios similar to mine? What percentage of your time do you spend working with people who have my investment needs?
  • How does your education pertain to your current work?
  • What professional licenses do you hold?
  • Are you registered with the SEC, a state securities regulator, or FINRA?
  • How many years of experience do you have in an advisory capacity?

• How is your disciplinary history?

  • Have you ever been disciplined by a regulator? If yes, what was the problem and how was it resolved?
  • Have you had customer complaints? If yes, how many, what were they about, and how were they resolved?

• What will my costs and fees look like?

  • What is your fee structure? How do you get paid?
  • Given my situation and what I’m looking for, what is the [best / most cost effective] way for me to pay for financial services? Why?
  • How and when will I see the fees I pay?
  • If I invest $1000 with you today, approximately how much would you get paid during the following year, based on my investment?
  • Does someone else (such as a fund company) pay you or your firm for offering or selling these products or services?

• How will you communicate with me?

  • How often should I expect to hear from you?
  • What if my investments aren’t performing? How would you suggest resolution steps?
  • How can I keep track of my investment status? Will you provide me with regular updates or will I have overview access of my account?

Ultimately, these questions just serve as a common template to provide context for your due diligence. It may feel uncomfortable, but getting this out of the way can establish a strong foundation for a relationship built on trust between you and your advisor. Not only does it offer the chance for you to learn about your advisor, but it also establishes a standard for transparency and accountability.

Additional Resources

You can search the SEC’s database for financial professionals named in court orders and/or complaints here. If you’ve been victim of fraud or misconduct by an unscrupulous investment advisor, contact our team. We can help you navigate the complaint and litigation process and even help you explore potential loss-recovery options. Check out our blog for even more investment and securities news and tips.

Common Cases of Broker Misconduct

Investment fraud and broker misconduct can come in a variety of forms. From the blatant to the well-concealed, here are some common cases of when brokers aren’t looking out for your best investment interests.

Excessive Trading

One of the most pervasive issues plaguing the investment industry, excessive trading can be tough to cap. Since most brokers earn a commission on trades and transactions, they may be tempted to take frequent or unnecessary action with your accounts. This process, also called churning, is one of the biggest problems for securities regulators. Churning can come in several forms: unauthorized trades, frequent trading, and excessive fees. This is where it becomes important for you to take an active role in your account management. Review any account statements and trade confirmations. Look for red flags and if something doesn’t look right, talk to your broker right away.

Broker Selling Unauthorized Investments

Just because your broker is licensed with a registered firm doesn’t necessarily mean they’re selling you authorized investments. The Securities and Exchange Commission (SEC) has noticed a trend on the rise of brokers operating unauthorized “side-businesses” outside of their registered brokerage firms. Often times, a broker may attempt to pass off these outside products as coming from within the firm. Other times, they may try to deflect or conceal source offering. The SEC warns investors to look out for the following red flags regarding unauthorized investment offerings:

• Your broker requests a check or money order in payment to an outside entity or different firm
• Your broker tries to sell you an investment without providing any upfront paperwork
• Deposits and/or transactions regarding you investment do not appear on your account statements
• You receive a statement from a different firm regarding your investment

So how can you tell if your broker is keeping your best investment interests in mind?

Well, there are definitely some clues you can look for when vetting a potential broker to try and mitigate that risk ahead of time. But there are also some early-warning signs and sure-fire red flags for which you can monitor. The key thing is that you need to take some sort of hands-on approach to your financial planning. The margin for potential broker misconduct just becomes too great if you aren’t holding the reigns on investment decisions. Don’t get left in the dark about your investment decisions. You have every right to make sure that your broker is pursuing your investment interests exactly according to your financial plans. Here are some tips and advice to make sure that:

1. You find a broker-dealer/firm that you feel confident you can trust
2. Your broker-dealer is always keeping your investment interests in mind

Finding the Right Broker

Knowing that your broker-dealer is looking out for your investment future starts with knowing your broker. Here’s some things to ask when choosing a broker to make sure you find the right one.

Make sure they’re licensed

Always make sure your broker is properly licensed and in good standing as a financial professional. You can do an easy online search of registered and licensed broker-dealers here.

Be clear with your investment goals

When vetting potential brokers, be clear about your financial plan. Make them aware of your goals and discuss the services and products needed to meet those goals. Make sure that your broker can provide these services and products.

Understand your cost-breakdowns and service fees

When choosing a financial professional, it’s helpful to understand how they get paid. When talking with potential brokers, make sure you discuss costs for the services and products you need. Find out how these costs are broken down and make sure you understand how your broker’s fees get paid.

Know Your Broker

Sometimes — especially when it comes to brokerage fees — vetting financial professionals can be uncomfortable. It can feel awkward to approach the subject of how one gets paid. Other times, it may be intimidating to meet with financial professionals. First-time or novice investors may be nervous about asking the wrong questions or appearing dumb. However, you need to remember that your broker is there to work for you. It is there job to make the right decisions for your investments. It’s natural for a broker to know more about financial investing than you – that’s what they are there for. But it’s your job to find out who your broker is. While it may feel awkward, selecting the right broker is a personal process and you shouldn’t feel bashful or intimidated. Often, it is best to ask direct questions. This is the best way to establish open dialogue with potential candidates.

Protecting Your Investment Interests

If you think your broker is not keeping your best investment interests in mind, action you can take is to ask questions. Don’t feel intimidated about asking if you see something on your account that looks unfamiliar or you don’t understand. If you don’t trust the answer your broker is giving you, ask your broker’s firm. The firm’s compliance department will be able to answer any questions that your broker is unable — or unwilling — to answer. If you believe you have suffered an investment loss due to broker misconduct or securities fraud, contact our team. We can go over the details of your claim and explore loss-recovery options.