The securities industry is set up to make it look like all the financial advisors selling investment products are super successful, financial specialists, vice presidents, etc. All of these things are done intentionally so that you trust them and think that they are investment gurus who will be great with your money. The reality is that this is not always the case. That is just the illusion of the industry. So it’s important to ask the right questions to make sure you’re hiring the right professional. The reality is that the brokerage industry, like any other industry, has good financial advisors and bad financial advisors. Here are some tips on how to make sure you’re getting a good one.

(1) FINRA BrokerCheck

The first tool you should use to research your financial advisor is something called the FINRA BrokerCheck. BrokerCheck is a publicly available tool. You can go to and in the upper right hand corner of that website is something called BrokerCheck. You can literally type a person’s name, hit enter, and you’ll get what’s called the BrokerCheck report, which will detail all the information you need when researching your financial advisor.

BrokerCheck will be able to tell you how the assessor did on his licensing exams, where he worked, what school he attended, if he’s ever been charged with a crime. Have you ever filed for bankruptcy? Have you ever been sued by a client? Have you ever been fired by your brokerage firm? These are all things that would be absolutely critical before establishing a relationship with someone who will manage your life savings.

During client intake, the first thing we do is look for your BrokerCheck report. We start rattling off all this information to the potential client about their advisor and they are often surprised. We are not magicians and I don’t know all financial advisors. Literally all we’re doing is pulling this publicly available information and looking at the report. And many times we tell a potential client that his adviser has already been sued several times and that the investor had no idea.

Obviously, that would have been critical information to know up front when they were deciding whether to work with that person. If they had put out that report, if they knew for example that the person they were considering had already been sued 26 times by former clients, they would never go with that person. So obviously the first thing you need to do is get that report out.

(2) Questions to ask

The first good question to ask a potential broker would be “How are you compensated?” Not all financial advisors receive the same compensation. Some of them are compensated on a commission basis, which is per transaction. Every time they make a recommendation to you and you agree, they get paid. Some of them are paid a percentage of the assets under management. If you have a million dollar portfolio and they earn 1%, they’re going to make $10,000 a year.

You can determine what you are looking for based on the type of investor you are. If you are a buy and hold investor, perhaps a commission model makes sense for you because you may only be doing two or three trades a year. If you trade a lot and have a very active relationship with your adviser, perhaps the asset management model makes more sense. But ask the question first and foremost so you know and don’t be ambiguous.

The second question to ask yourself is “does the financial adviser have a fiduciary duty to you?” Ask them exactly that question because the brokerage industry will take the position that they won’t. Their obligation to you from your perspective is to make an investment recommendation that is appropriate. That’s a much lower bar because sometimes an investment may be right for you but not necessarily in your best interests. So ask your financial advisor, “Do you feel you have a fiduciary duty to me?” Let’s find this out early in the relationship to make sure you know where you stand.

Another question to ask is: “Who are you registered with?” A lot of financial advisors are independent and have a “doing business as” business, wherever their offices are, but are registered to sell securities through a larger brokerage firm. Find out who it is. Do some research to make sure you’re getting involved with a brokerage firm that has the kinds of oversight and compliance you’d expect.

There are two types of brokerage firms. There’s the Morgan Stanley model where they have a brokerage center in a major city. Maybe 30-40 runners in an office. There are compliance people, there are supervisors, there are operations people, all in the same located office. In my experience you see fewer problems in that kind of situation because all the supervisory people are there.

On the other hand, there’s the freelance model: You’re a consultant in an office somewhere, and your fulfillment is in Kansas City, or Minneapolis, or St. Louis, or wherever. The supervisor comes to the office once a year and audits the books and reviews the activities of the assessor from the previous year. These visits are usually announced well in advance. Obviously supervision in that context is very different. And that is the type of firm where we see more problems.

You want to make sure that you are getting involved with the right company. That the firm is monitoring their financial advisor, protecting him, making sure that if they’re doing something wrong, they’ll catch it before it’s bad for their accounts.

Another good question to ask: “Have you ever had a dispute with your client?” If he says yes, ask him to explain it to you. No one is perfect and you can’t keep everyone happy, so if you have a hundred customers and you’ve been in business for 10 years, there may be someone who was mad at you at some point. But it may not reach the level that concerns you, but ask about it, talk about it.

Ask about their investment background and goals. Not all financial advisors do it the same way. You want to make sure that your goals are consistent with yours, and your approach is consistent with theirs.

And lastly you should ask “do you have insurance?” The brokerage industry does not require brokerage firms or financial advisors to carry insurance. Many of them do, but they are not required to. The reason that can be significant, of course, is in the worst case scenario and you have a dispute with your adviser, you at least want to be with a financial adviser who, if you make a mistake, has some protection. So ask them “do you have E&O insurance for this?” If not, that’s a red flag. Either just for collectability concerns if you are in a situation where you need to sue your adviser or it could be a suggestion that they are not operating their business in the best possible way because certainly financial advisers should have E&O insurance.

(3) The next thing to consider are possible warning signs. These can appear either at the initial meeting or right when the relationship begins:

– They rush you to make a decision. We see this in many of our cases where they ask you to come to the meeting and say, “Sign here, here, and here. I have an appointment in 15 minutes. If you have any questions, call me later.” That is an obvious warning sign. That should be clear to most people. But I think a lot of people are afraid to climb because they think, “Oh, well, he’s too busy.” and makes it look like he has tons of clients and is very successful. So maybe it’s okay that he doesn’t have time for me. No, it’s not okay. Find someone who has time. Your advisor gets paid to manage your account, so make them work for it.

– They don’t tell you what they’re paid. That is definitely a warning sign. The genesis of most securities fraud claims is commissions: advisors promoting high commission products that benefit them to the detriment of their client. If the adviser isn’t disclosing what those fees are, that’s a problem.

– They want to put everything in a single investment. This is a big warning sign. What is the motivation for doing that? Most people know that diversification is critical when investing, so if you have an advisor who says, “Hey, let’s use this investment, it’s the best, it’s better than anything else, we’re going to put everything into this.” That is another warning sign.

– They want to meet you alone. What would be the motivation? Let’s say you’re a senior and you want to take your child to a meeting for support and your counselor says no… That’s a red flag because obviously if they’re up to speed they shouldn’t have a problem with more people sitting. at the meeting, making sure you are being cared for.

– If your adviser does not spend time with you (at the beginning and regularly afterwards) asking you about your real investment needs (objectives, time horizon, risk tolerance, etc.), that is a problem. Investments are not vanilla. Every investment is not perfect for every person. Each investment depends on your particular situation. If your adviser doesn’t ask you where you stand: your net worth, your income, your investment objectives, your investment experience, your goals, that’s a big red flag.

– If your account statements do not come directly from the brokerage house, it is a red flag. If the statements come directly from your financial adviser and you don’t see anything about the brokerage firm through which they settle, that can be a problem. That could be a financial advisor hiding losses or simply sending you statements that are not based on reality. Most brokerage firms do not allow their advisors to create monthly reports or, if they do, require that they first be reviewed and approved by the compliance department. If there’s nothing on the statement that definitively shows it’s been reviewed/approved/sanctioned by the consultants’ employer, that’s a problem.

– If they ever ask for a check to be written to them individually, that’s a problem. Brokerage firms are set up to make sure that kind of thing doesn’t happen, and so if your adviser is doing it, there’s a good chance his firm hasn’t approved it.

– If you suffer big losses without any reasonable explanation, obviously that’s a problem. Many brokers will tell you “it’s the market” or “forces out of my control”. That may be true, but you want to talk about it and make sure you get a reasonable explanation.

Here are some tips on how to choose the right financial advisor. It is an important decision, and one that should not be taken lightly or without being informed.

Leave a comment

Your email address will not be published. Required fields are marked *