In last week's blog post, I discussed Ponzi schemes and ways to guard against fraudulent investments. This week, I'm going to talk about how to guard against fraudulent advisors. While there are no guarantees, a little homework on your part will go a long way towards protecting you.
There are two main organizations that monitor financial advisors and provide free access to their information via their websites. There are some ancillary sites we'll cover as well. In the interest of full disclosure, we'll use me as the guinea pig to review the available information from these groups.
The most widely used agency is The Financial Industry Regulatory Authority (FINRA), which oversees about 4,400 financial firms with about 630,000 financial advisors. On their website, there's a section here where you can enter your advisor's or firm's name, and see lots of information. (I've attached a link with my report if you want to follow along.) You can see your advisor's:
* Qualifications. This also shows if your advisor has ever been suspended with any regulator, obviously a warning sign.
* Registration (Employment) History. This is important because you'll probably want an advisor who's been around for a while. Also, it's a danger sign to see lots of names on this section: if an advisor frequently switches firms, I'd worry about compliance problems, personality issues, and the like.
* Disclosure events. This is a critical section, showing if your advisor has ever been sued, declared bankruptcy, received client complaints, etc. In my opinion, one red flag, maybe two, is not a deal-breaker. However, I would certainly carry out extra due diligence on an advisor with any issues in this section.
* State registration information. Make sure your advisor is licensed by your state. You'd be surprised how often red flags pop up here.
* Industry examinations passed or failed. Note that these only show FINRA exams. I have three financial planning designations and degrees, but none of them are listed here.
* Any other business or professional affiliations or activities. This is important to check conflicts of interest. (For example, I met with someone yesterday whose advisor invested all the money into a chain of restaurants. Guess what the advisor's other affiliation was?)
The Securities and Exchange Commission (SEC) also provides information about investment advisers here. (You can see my information on the attached link.) I find these easier to read than FINRA's, but as you can see, they show less information, and there are many details missing. That said, there are cases where advisors are covered by the SEC, but not by FINRA, so check both sites.
One good ancillary site to check is Brightscope. They pull information from both FINRA and the SEC, and also show information on your advisor's company. Again, there is a lot of missing information, but it's a quick, one-stop place to see basic information.
(By the way, if you're a participant in a 401(k), 403(b), or 457 plan, Brightscope has an excellent section which rates and reviews your plan. Go here and find your employer's name. If your plan is expensive, or has poor investment options, you'll see it here. Pass the information to your human resources or benefits department, and hopefully they'll find better choices for you.)
Finally, if you want to check your insurance agent, check your state's insurance department (California's is here.) You'll see which insurance companies will do business with your agent (in general, the more choices the better), how long your agent has been in business, and more importantly, if there's been any legal problems along the way. You won't find much about me here, as I let my insurance licenses lapse fourteen years ago, so I could focus on financial planning and investment management.
Very few people check up on their financial advisors, which is a shame. It will only take you a few minutes to visit these sites, pull up your advisors, and check their information. I never understood why people will check the likes of Yelp before spending $50 at a restaurant, but not before spending hundreds or thousands with an advisor. Protect yourself and carry out your own due diligence. And as always, please respond with any questions or comments below.
Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For twenty-three years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have comments or questions about this blog, please post in the "Comments" section below, or call Lou directly at 925-997-8507.
In some enterprises, it may not even matter how one is either certified or even qualified out there to be dispensing their advice, because in the end, all those certifications and qualifications out there only serve to make one "look legal" in the eyes of The Law and "look legit" in the eyes of the customer Sometimes no amount of certification, licensure, or even education out there is going to protect a customer from the proverbial "snake oil salesperson", especially those that actually trade on the advice that they give to their customers and as long as there are paying customers out there either willing and/or gullible enough to pay and even listen, perhaps there may be no reason for a professional, regardless of the profession, to change And when it comes to a Financial Planner, they are only as good as their advice, because that is what they trade on There sometimes seems to be a great deal of "showmanship" in how anybody sells anything these days, with the maxim there being to "sell the sizzle" and advice, even financial planning advice, certainly fits that category, but even when hamburger is cooking, the sound of its sizzle is not that distinguishable from that of cooking steak No certifications or qualifications may help because all that says is that they are certified and qualified
As mentioned in last week's discussion, about the only sound advice out there is "Caveat Emptor"--"let the buyer beware" And when it comes to advice, even from professionals, about the best armament out there against bad advice is information It's better to know what you are seeking than have somebody else define that for you, because you might be disappointed by the results that they might bring and the consequences that following their advice may have For all I know, this particular Financial Planner may be a good one, or he may be another person out there trading on "snake oil", but then again, I'm not a customer and probably never will be because I have nothing to invest here (or waste here) but my time But when they tell you about their certifications and qualifications, once you have them, do some research of your own as to what those certifications and qualifications mean, because anybody out there, no matter how good their intentions, or how nefarious those intentions, can be, or appear to be, certified and qualified--sometimes all it takes is paying fees, taking tests and passing them
That said, people should at least know what to look for, and where to find it. That's why I wrote this particular blog. Thanks for your comments! --- Lou
People should exercise due diligence with any of their advisors: financial, legal, medical, whomever. There are no guarantees in life, and assuming someone is competent and responsible, there is no one more trustworthy to look after his or her own interests. That said, there are many occasions where people will look for advice from others. When they do, they should know where to look, and what to look for. I submit that having some certifications is better than none, and higher qualifications trump lower ones. --- Lou
What kind of work do you perform in the finance industry? Readers would probably like to have your input regarding issues in this blog, so I hope you keep reading and commenting. I appreciate your caution about Cal, but I don't think he's a bad guy (or gal). There are some really bad trolls out there, but I don't put Cal in their midst. Thanks again! --- Lou
On the Cali thing, I've seen some websites get totally messed up by trolls so i might have a tendency to err on the side of cynicism. He went on and on arguing about Ponzi schemes when three minutes on Wikipedia could have shown him he did not know the definition. Trolls will purposely pretend ignorance and aggressiveness just to stir the pot. I could be wrong.
I didn't know you'd seen the Ponzi discussion. I agree with you that it became a little over-the-top. My theory is that people have five "hot button" triggers: religion, death, sex, politics, and money. Discuss any of these, and some readers get their buttons pushed and become overly involved in the conversation. So, I cut people a lot of slack. If you really want to see trolls, check out my blog from January 4th regarding corporate matching contributions in group retirement plans. You'd think showing people a way to get free legal money would be uncontroversial, right? Not the way it turned out. By the way, since you use financial modeling for your clients, which types of questions are you frequently receiving? Maybe we could turn them into a blog topic together. Thanks again for participating in the discussion! --- Lou
A "Man From U.N.C.L.E."? Would actor Robert Vaughn play your character in real life? Would all the episodes in your life have the name "Affair" at the end? Please tell us more, you got me curious. Oh, and one more thing, trolls usually "stir stuff up" for the sake of stirring stuff up (family show, so we must be on our best behavior in this forum), if I post, it is because I believe that the subject matter is important enough to me and that I think that other people should see that viewpoint out there and chime in. When it came to the stuff in Mr. Dagen's January 4th blog, I steered clear of that one, because it turned into a "free-for-all" and hopefully the thread got closed. And usually when one encounters "trolls", it's best not to resort to name-calling--even calling them "trolls" outright, because all that does is turn the level of discourse into personal attacks and maybe a little hateful speech out there, and like toothpaste, it's not that easy putting it back into the tube. We all have to work on keeping the level of discourse civil out there and hopefully we can learn from what is being said out there in the process and if one doesn't like the opinions voiced in what they post, don't read what they post. Remember the US Supreme Court decision in "Cohen v. California" (403 US 15 (1971))? That standard applies here, too.
"Definition of Stationarity: Formally, let \left\{X_t\night\} be a stochastic process and let F_{X}(x_{t_1 + \tau}, \ldots, x_{t_k + \tau}) represent the cumulative distribution function of the joint distribution of \left\{X_t\night\} at times t_1 + \tau, \ldots, t_k + \tau. Then, \left\{X_t\night\} is said to be stationary if, for all k, for all \tau, and for all t_1, \ldots, t_k, F_{X}(x_{t_1+\tau} ,\ldots, x_{t_k+\tau}) = F_{X}(x_{t_1},\ldots, x_{t_k}). Since \tau does not affect F_X(.), F_{X} is not a function of time." At that point, I gave up. :-) Take care and I hope you keep reading and commenting. --- Lou
Or is that calculus? Whenever I see notation for "the function of 'x' equals..." it has me having bad flashbacks to my business calc class when I was a junior at Colorado State back in 1987. When it's time to remember how derivatives were formulated, then it's time for Aleve.
I have to suggest one correction, though. Cohen v California ruled that the State of California cannot suppress most forms of speech. The Patch is privately owned, and can therefore constrain whatever it likes. Oh, and the January 4th comment section is still open if you'd like to contribute. :-) --- Lou
But the Cohen standard applies because one can always "avert their eyes" when they see or read something that may appear as offensive, and that approach has to be taken here at times, where if one does not like what is being posted here, it's better to use the "scroll" function in one's web browser to move the page up or down so that the offensive posting no longer appears in that browser. And when one encounters a prospective "Mohammed Atta" out there intent on treating the discussion threads as their version of "American Airlines Flight 11" on that very awful Tuesday in September 2001 attempting to turn the discussion thread to suit their own purposes--which IS typical "trolling" behavior, scrolling seems to work best here in these situations. Don't engage anybody you perceive as a "troll", because all you would be doing there is "playing their game" and allowing them to steer the discussion thread their way. Even though I have been accused of "trolling", there are others out there that have done more than their fair share of "hijacking" discussion threads and turning them to suit their own purposes. I find it best off not to add to all that "noise and cacophony" out there, but that's me.
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