Regardless of your investing experience, nobody knows everything there is to know about stock and securities trading. That’s why you have probably enlisted the help of an investment professional, either as a sounding-board for investment decisions or to assist you in facilitating and completing transactions. An investment advisor or a broker-dealer can be a great asset as you build and diversify your portfolio.
However, for all the good they can do, an investment advisor who does not have your best investment interests at heart can pose a serious risk to the health and stability of your portfolio.
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:
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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?
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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?
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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?
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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.