The Informed Investor

Is Your Financial Advisor Hiding Something You Need to Know?

Randy Garcia

May 27, 2020

Financial advisors are assumed to be trusted professionals who help you manage your money. The key word in the last sentence is “assumed.” Most people automatically believe financial advisors are trustworthy, but assumptions like that can be hazardous to your wealth.

If you work with a financial advisor, or if you’re considering hiring one, here’s a statistic you need to know: Twenty percent of financial advisors have regulatory compliance disclosures against them.[i]

What kind of disclosures? Well, you can think of it this way: each financial advisor has an official record with the regulatory agency that he or she is registered with. These disclosures can cover a range of actions:

  • criminal charges
  • customer complaints
  • bankruptcies
  • regulatory actions or terminations

When you’re looking for someone to advise you on your investments and financial matters, records about an advisor’s honesty and history with money are critical to know.

Financial Advisors May Have Tainted Pasts

In a few instances financial advisors can be felons, as long as the felony doesn’t fall in line with one of the Financial Industry Regulatory Authority (FINRA)’s reasons for being denied. During the process of determining if someone can become licensed as a financial advisor, a criminal background check will be performed by the Uniform Application for Securities Industry Registration or Transfer. The questions they ask are:

  • Did you enter a guilty plea or a no-contest plea?
  • Were you convicted?
  • What was the crime?
  • How long ago was it committed?

Failure to answer these questions honestly can lead to automatic denial. All questions are checked against the background check, so it’s in the best interest of the prospective financial advisor to answer truthfully.

While all crimes are considered, those that have to do with the following lead to an application being denied:

  • Investment Fraud
  • Financial Crimes
  • Bribes
  • False Statements
  • Extortion
  • Counterfeiting
  • Perjury
  • Forgery

Professional conduct is also evaluated. If someone has ever experienced a termination, regulatory action, or client complaints at their workplace, the incidents are thoroughly examined to identify whether they had to do with:

  • False Statements
  • Omissions
  • Finance Law Violations
  • Regulation Violations

Personal financial background checks are also required. Any problems with creditors or bankruptcies are documented in a disclosure, but it doesn’t automatically disqualify an applicant from becoming licensed as a financial advisor. The information just has to be made known to anyone who checks.

It’s Up to You to Check

This brings up the point that it is in your best interest to check into your financial advisor’s background before trusting them with your family’s financial welfare. Most financial advisors will not divulge negative information about themselves. They know investors will be less likely to use their services if they do, so they don’t volunteer negative details about their past. Unsuspecting people who don’t check may be dealing with someone who has multiple client complaints or settlements on their record.

Fortunately, there is a way to avoid all of this…and it just takes a few minutes of your time.

How to Find a Financial Advisor’s Rap Sheet

No matter how confident you are about using a financial advisor, ALWAYS take a minute to look up their history. The Financial Industry Regulatory Authority (FINRA) has made it possible for people to check the history of financial advisors quite conveniently using this website: brokercheck.org.

Not all financial advisors are registered with FINRA. Some are registered with the Securities and Exchange Commission instead. Fortunately, you can use the brokercheck.org website, and it will direct you to the SEC website if that is the correct location for background information on your advisor.

All you have to do is enter the person’s name, firm name, and location to see all the disclosures.

As you look at the results, focus on the most important information:

  • Customer Disputes
  • Terminations
  • Judgments/Liens
  • Bankruptcies

You should also pay attention to the advisor’s work history. Changing firms frequently is not a good sign. It often means the person either doesn’t get along well with others or does not perform well. In any case, it might be a red flag that this is someone you may not want to trust with your investments.

If a financial advisor had to pay a fine or restitution to a client, you should probably reconsider choosing that one. While it is possible there is an explanation you’d find acceptable, your money is too important to risk on the benefit of the doubt.

Existing Financial Advisors Should Be Researched

If you think you don’t need to check on your financial advisor because you’ve used him or her for a while and everything is great, think again. You would be surprised by how many people find out that their financial advisor has some black marks on their record.

Even if you did a search when you first considered using your financial advisor, you should do another one every year. This way you know if there have been any recent issues that would make you feel uncomfortable with that person managing your money.

It’s better to be safe than sorry when it comes to financial matters. Don’t risk your financial future; invest a few minutes to do a quick online check. Statistically, you’ll probably find that your advisor has a clean record. And if you don’t, at least you will have some new information to use as a resource when making important decisions about whom to trust.

 

[i] Fahey, Mark. “Is Your Financial Advisor a Criminal? Stats Say …” CNBC, CNBC, 10 Nov. 2015, www.cnbc.com/2015/11/09/is-your-financial-advisor-a-criminal-stats-say.html.

 

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