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Have You Done Due Diligence on Your Financial Advisor?

One of the most important and most overlooked things to do when hiring an advisor is to perform due diligence and do a background check on your advisor prior to hiring them. This important action should be done by anyone who is looking for hire an advisor for the first time, but it should also be done annually by everyone that has an advisor, even if you have known this advisor for years.

The Numbers

There are over 600,000 financial advisors in the United States, not counting those only licensed to sell insurance. The number of bad actors on a percentage basis is low. Only 7% of all advisors have some publicly known infraction, and by comparison medical doctors and attorneys have more instances of violating industry rules or receiving patient/client complaints than financial advisors do. Of the 7%, approximately half of these advisors’ publicly known infractions are minor and in general not cause for concern. For example, an advisor with 30 years of experience could have one client complaint from the market correction of 2008, and this type of public record is normally not an issue. The other half of the 7% have many negative instances of violating rules, or been levied fines, or even misdemeanors and felonies. When you see 5, 7, 10 or more negative records on an advisor’s record, you should consider looking for a new advisor.

Is Your Advisor an Advisor?

When considering a new advisor, the very first thing you should do is verify they indeed are a licensed financial advisor or broker. Unregulated and unlicensed scam artists harm investors more than any other type, so make sure they are regulated. If the advisor is not in the following database, it is a near-certainty they are violating the law: https://brokercheck.finra.org/ you may need to further click through to the “SEC” database to see the detail on the advisor in the case they are regulated by the Securities and Exchange Commission and not FINRA, the regulatory group that governs brokers. If you do not see your “advisor” in these databases, ask them directly why not, then seek an expert to see if their answer is legitimate, as 99% of the time, if the person is not in these databases, they are operating illegally.Once you see your advisor listed, look to see if there are any “Disclosures” which is where client complaints, fines, and any negative information is disclosed to the investing public. Over 90% of advisors do not have any disclosures, so if you see there are disclosures, read them carefully. If the advisor has many disclosures, this is a red-flag and you should proceed with great caution prior to hiring them.

“He is Such a Nice Man, She is Lovely” is not Enough

Having a strong personal relationship is quite beneficial to a productive relationship between an advisor and their client, however, the small number of bad advisors and scammers use personal bonds for nefarious purposes. It is exactly how Bernard Madoff got away with his multi-decade Ponzi scheme. If you have an advisor that you have used for many years, or if a personal friend or neighbor is an advisor and you are about to hire them, make sure you check the above regulatory databases to ensure they are licensed and to review any disclosures.Finally, the above techniques for reviewing an advisor’s background does not assure you the advisor is competent or good at their specific advice service, we will cover more detailed diligence in future articles. However, so many investors never check any of the background of their advisor, it is a great first step and precaution to ensure you do not unwittingly hire an unlicensed person or one of the 3 ½ percent of advisors with very negative backgrounds.

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