It may seem like common sense to know who you are investing your money with, but I am amazed at how often people don’t even do simple background checking on their investment advisers. Perhaps they don’t know how.
Anybody who is securities registered has a record that’s easily viewed online. Go to www.Finra.org. FINRA (Financial Industry Regulatory Authority) is the industry agency that oversees broker dealers and registered people who sell securities.
If an individual is not registered with a broker dealer that is a member firm with FINRA, they may be regulated by the Securities and Exchange Commission. Either way, an individual’s record is public and easily viewed.
What to look for
Does your investment adviser or broker have a lot of customer complaints? Has she had a lot of personal financial problems like liens, judgments or a bankruptcy? Has he even had some criminal complaints? You might want to know all these things, and it’s all readily available.
The public record will list things like licenses held, years in the industry, employment history, etc., but one of the things most people are really interested in is called “disclosure events.” As per FINRA’s own wording: “All individuals registered to sell securities or provide investment advice are required to disclose customer complaints and arbitrations, regulatory actions, employment terminations, bankruptcy filings and criminal or civil judicial proceedings.”
On FINRA’s home page is a box called Broker Check. You can input the name of anyone who is securities registered or any broker dealer in that search box. Once you find the person or firm’s name, you can select it and a summary record will appear that gives you basic information. You can download a PDF of a full report, which gives much more detail.
There is no reason not to check this report before working with anyone who is securities licensed.
Not all securities-licensed individuals have a fiduciary duty to you, and this is also easily determined. Simply put, a fiduciary duty means that the adviser has a duty to put your interests first above his or her own, they have to disclose any conflicts of interest, and they have a duty of utmost care and loyalty to you. Some licensed individuals might only be registered representatives and provide “suitability” standard.
On the first page of the FINRA summary under the “Disclosure Events” section I just mentioned should be a heading: “Investment Adviser Representative.” If this section does not appear, that person is only a broker as opposed to an investment adviser representative.
The value of background checking
A few years ago, I had a gentleman come into my office who wanted to work with me — not as a client, but as some sort of cooperative business arrangement.
He peppered me with questions as to my opinions on various investments, the stock market, interest rates, etc., and then he showed me many online video clips of himself being interviewed on the floor of the New York Stock Exchange and on various business news programs such as CNBC. It was quite impressive. He then showed me a book he had just written on international investing with a foreword by a famous economist.
I didn’t know who he was, but as soon as he left, I went to FINRA.org. I discovered that he is permanently barred from the securities industry. It took me less than a minute to find this out.
Other background checking
Of course, you can always use Google, the Better Business Bureau or other sources to find out more about an adviser or an investment. I once had a friend who “invested” $9,000 in a company that made rudimentary shopping websites, and he was supposed to earn some sort of a commission on product sales. Of course, he never made a penny.
When I found out about it, I tried to help him get his money back. It ended up being covered on PBS’ “Nightly Business Report.” When the reporter called the company, they relented and refunded all his money. This was nearly a year after the fact.
As the reporter mentioned in his newscast, if my friend had simply done a Better Business Bureau search, he would have seen that the company had a “D” rating. That should have been enough to know to stay away.
Most stories like this don’t have a happy ending. It’s best not to lose the money in the first place rather than try to get it back after. Always do your background checking.
David Treece is an investment advisor representative offering Securities and Advisory services offered through Cetera Advisors LLC, member FINRA, SIPC. He can be reached at firstname.lastname@example.org.
▪ This piece was written for the ‘My View’ space in Business Monday in the Miami Herald and does not necessarily reflect the newspaper’s viewpoint. Have a ‘My View’ offering? Submit ideas to rclarke@MiamiHerald.com.