Consumer Hub: Protection & Prevention

NEA Guide to Background Checking Your Financial Advisor

How to Select a Financial Advisor You Can Trust

Years ago, a million-dollar financial fraud was big news. Now, $50-million and even $50-billion financial scams have become almost commonplace. But they’re anything but routine to the consumers who have lost their life savings. They learned a hard lesson: Trust, but verify, before investing a penny.

How to do this? First, ask the advisor questions over the phone. Then examine the person’s disclosure documents and check for disciplinary actions with regulatory agencies.  Finally, interview the advisor in person.  Doing your research—or due diligence—takes time. But given the risks today, it’s time well spent. This consumer guide will get you started. 

Protection Strategy #1: Interview the Advisor by Phone

Here are the top five questions to ask:

1.    What is your full personal name?

You need this for online searches. Also ask if the person has used other names in the past. 

2.    What services do you provide and to whom?

The answers will determine if the person can help you. You also want to know whether the advisor is comfortable serving clients like you.

3.    How are you licensed?

You want to know whether the advisor is a licensed insurance agent, a securities broker, and/or an investment advisor. Insurance professionals are regulated by state insurance departments; brokers, by state securities departments and the Financial Industry Regulatory Authority (FINRA); and investment advisors, by the Securities and Exchange Commission (SEC) and state securities divisions. If an advisor has a securities license, ask for his or her Central Registration Depository (CRD) number.

4.    How long have you operated/lived here?

Make sure you know where the advisor worked and lived in the past, so you can check with regulators in those locations. Be wary of repeated moves to new states.

5.    What further disclosures can you provide?

Ask the advisor to mail you his or her firm brochure. If he’s an investment advisor, ask for SEC Form ADV (Part I discloses disciplinary actions; Part II, information about fees and strategies). ADV forms are also available from the SEC and state securities departments.

If the advisor is reluctant to answer any of these questions, watch out! The advisor may something to hide. Cross that advisor off your list.

Protection Strategy #2: Check with Regulatory Authorities

Here are your top three sources of information:

1    FINRA

FINRA maintains a BrokerCheck database. Search by entering either the advisors full name or CRD number. Ideally, the person should have no reported disputes, disciplinary, or regulatory events.

2.   SEC and State Securities Regulators

Investment advisors with $25 million or more under management must register with SEC. Those with less register with their state.  To access an advisor’s ADV form, visit the SEC’s Investment Advisor Public Disclosure website. If the SEC has no record of the advisor, check with your state securities department. Find your state regulator here.

3.   State Insurance Departments

If your advisor is licensed to sell life insurance, make sure she has a clean record with your state regulator. Either check the agency’s web site or call them. Get contact information here.

If your research shows a history of infractions and complaints, take your money and run.

Prevention Strategy #3: Do a Face-to-Interview

Here are your main questions to ask:

  • Have you ever been disciplined by a government regulator or sued by a client? This might flush out problems that regulators haven’t announced yet.
  • Do you recommend alternative investments or hedge funds? Such investments are less regulated and may give the advisor more freedom to misuse or steal your money.
  • Is your firm the custodian of my money or do you use a third-party custodian such as Fidelity? Avoid advisors who do not use a third-party custodian.  This prevents them from creating phony statements.
  • Have you been checked out by the National Ethics Association? See if the advisor has voluntarily submitted to a National Ethics Association background check. This will indicate the person has nothing to hide. 

Bottom Line

So the choice is yours . . . you can either check out a prospective financial advisor or risk becoming a victim of investment fraud. With the help of this guide, we know you’ll do the smart thing.