How to Check Your Financial Advisor

Last week's blog discussed Ponzi schemes. This week, we're going to learn how to guard against fraudulent advisors.

In last week's blog post, I discussed Ponzi schemes and ways to guard against fraudulent investments. This week, I'm going to talk about how to guard against fraudulent advisors. While there are no guarantees, a little homework on your part will go a long way towards protecting you.

There are two main organizations that monitor financial advisors and provide free access to their information via their websites. There are some ancillary sites we'll cover as well. In the interest of full disclosure, we'll use me as the guinea pig to review the available information from these groups.

The most widely used agency is The Financial Industry Regulatory Authority (FINRA), which oversees about 4,400 financial firms with about 630,000 financial advisors. On their website, there's a section here where you can enter your advisor's or firm's name, and see lots of information. (I've attached a link with my report if you want to follow along.) You can see your advisor's:

   * Qualifications. This also shows if your advisor has ever been suspended with any regulator, obviously a warning sign.

   * Registration (Employment) History. This is important because you'll probably want an advisor who's been around for a while. Also, it's a danger sign to see lots of names on this section: if an advisor frequently switches firms, I'd worry about compliance problems, personality issues, and the like.

   * Disclosure events. This is a critical section, showing if your advisor has ever been sued, declared bankruptcy, received client complaints, etc. In my opinion, one red flag, maybe two, is not a deal-breaker. However, I would certainly carry out extra due diligence on an advisor with any issues in this section.

   * State registration information. Make sure your advisor is licensed by your state. You'd be surprised how often red flags pop up here.

   * Industry examinations passed or failed. Note that these only show FINRA exams. I have three financial planning designations and degrees, but none of them are listed here.

   * Any other business or professional affiliations or activities. This is important to check conflicts of interest. (For example, I met with someone yesterday whose advisor invested all the money into a chain of restaurants. Guess what the advisor's other affiliation was?)

The Securities and Exchange Commission (SEC) also provides information about investment advisers here. (You can see my information on the attached link.) I find these easier to read than FINRA's, but as you can see, they show less information, and there are many details missing. That said, there are cases where advisors are covered by the SEC, but not by FINRA, so check both sites.

One good ancillary site to check is Brightscope. They pull information from both FINRA and the SEC, and also show information on your advisor's company. Again, there is a lot of missing information, but it's a quick, one-stop place to see basic information.

(By the way, if you're a participant in a 401(k), 403(b), or 457 plan, Brightscope has an excellent section which rates and reviews your plan. Go here and find your employer's name. If your plan is expensive, or has poor investment options, you'll see it here. Pass the information to your human resources or benefits department, and hopefully they'll find better choices for you.)

Finally, if you want to check your insurance agent, check your state's insurance department (California's is here.) You'll see which insurance companies will do business with your agent (in general, the more choices the better), how long your agent has been in business, and more importantly, if there's been any legal problems along the way. You won't find much about me here, as I let my insurance licenses lapse fourteen years ago, so I could focus on financial planning and investment management.

Very few people check up on their financial advisors, which is a shame. It will only take you a few minutes to visit these sites, pull up your advisors, and check their information. I never understood why people will check the likes of Yelp before spending $50 at a restaurant, but not before spending hundreds or thousands with an advisor. Protect yourself and carry out your own due diligence. And as always, please respond with any questions or comments below.


Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For twenty-three years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have comments or questions about this blog, please post in the "Comments" section below, or call Lou directly at 925-997-8507.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Lou Dagen, CFP, ChFC February 17, 2013 at 07:12 PM
Cal, thank you for reaffirming the goal of a civil and substantive discussion. I have to suggest one correction, though. Cohen v California ruled that the State of California cannot suppress most forms of speech. The Patch is privately owned, and can therefore constrain whatever it likes. Oh, and the January 4th comment section is still open if you'd like to contribute. :-) --- Lou
Californicated1 February 17, 2013 at 07:53 PM
Correct, New York 'Times' v. Sullivan (376 US 254 (1964)) and Miami 'Herald' vs. Tornillo (418 US 241 (1974)) outline that there is no right of reply in the private press. But the Cohen standard applies because one can always "avert their eyes" when they see or read something that may appear as offensive, and that approach has to be taken here at times, where if one does not like what is being posted here, it's better to use the "scroll" function in one's web browser to move the page up or down so that the offensive posting no longer appears in that browser. And when one encounters a prospective "Mohammed Atta" out there intent on treating the discussion threads as their version of "American Airlines Flight 11" on that very awful Tuesday in September 2001 attempting to turn the discussion thread to suit their own purposes--which IS typical "trolling" behavior, scrolling seems to work best here in these situations. Don't engage anybody you perceive as a "troll", because all you would be doing there is "playing their game" and allowing them to steer the discussion thread their way. Even though I have been accused of "trolling", there are others out there that have done more than their fair share of "hijacking" discussion threads and turning them to suit their own purposes. I find it best off not to add to all that "noise and cacophony" out there, but that's me.
spyrdachet February 20, 2013 at 07:38 AM
Cal1 is lonely
Tom February 25, 2013 at 07:32 PM
If you ran a background check on Mr. Madoff as advised above what would have come up? Totally agree to check what you can using the available tools but it seems using a large public traded firm is the safest way.
Cheryl Martinez June 10, 2013 at 10:44 PM
What a very interesting article! Choosing the best financial advisor is never that simple. This requires a lot of thoughts and important considerations. This article helps so much. I think the best way to have one is to find one reputable independent financial advisor or someone from a reputable company. -http://www.financialadvisorplacementservices.com/


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