Advisor Background Checks a Must, Warn Regulators
SEC Urges Consumers to Run Background Checks on Advisors
These were recent headlines in Financial Advisor magazine and the by-product of a campaign by the SEC and by other regulators of financial advisors to raise public awareness of the BrokerCheck tool. The Financial Industry Regulatory Authority (FINRA) manages the BrokerCheck website, and this online database allows consumers to investigate their current or prospective advisors, and the firms that employ them.
You simply enter the advisor's name, and out pops his/her licensing and registration history, as well as details about any "disclosures" on the advisor's regulatory record. In FINRA's own words, "Disclosures can be customer complaints or arbitrations, regulatory actions, employment terminations, bankruptcy filings, and certain civil or criminal proceedings that they were part of."
BrokerCheck is also useful to consumers in that it clearly shows whether a given advisor is registered as a broker, or as an investment adviser, or as both. (Those looking for information on investment advisers are automatically directed from the BrokerCheck site to the SEC's Investment Adviser Public Disclosure site.) So in a backhand way, BrokerCheck provides consumers with the ability to derive which standard of care a given advisor owes them, i.e. a suitability standard in the case of a broker, a fiduciary obligation in the case of an investment adviser, or some mishmash of the two standards in the case of an advisor who is dually registered.
In these respects, BrokerCheck gives consumers a simple way to gain access to information about an advisor or advisory firm that might not otherwise be forthcoming or easily discernible. And this is particularly important in light of recent academic research that reveals just how endemic brokers with severe misconduct violations may be throughout the country and the industry.
In an upcoming article entitled, "The Market for Financial Adviser Misconduct", co-authors Amit Seru, professor at Stanford Graduate School of Business, Gregor Matvos, professor at the McCombs School of Business at the University of Texas, and Mark Egan, assistant professor at Harvard Business School, conclude that one in 10 advisors have serious misconducts on their records – and that that’s a conservative number, since this statistic was simply gleaned from the disclosures made public on BrokerCheck. (You can access a table ranking the Financial Advisory Firms with the Highest Employee Misconduct Rates here.)
We would argue that checking a financial advisor's regulatory record and standard of care to clients is just a necessary, but not nearly a sufficient, first step in your decision to engage one. For more insight on finding the best financial advisor for you, please click on The Search for a Financial Advisor or watch the following video on financial advisory business models and Five Seasons Financial Planning.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.