Use Resources to Check for Financial Adviser’s Past Misconduct

by | May 16, 2016 | *Financial Awakenings, Fee Only Financial Planning, Weekly Column

MagnifyingGlassPaperShopping for a financial adviser you can trust has never been easy. The new Department of Labor rule requiring brokers to act in a fiduciary capacity when dealing with retirement plan assets has not made it any easier. The government’s intent was to help consumers clearly distinguish when financial professionals can be relied upon to give unbiased financial advice or when they are acting in their own interests to sell a financial product. Unfortunately, the rule has only exacerbated the confusion.

When shopping for financial advisers, you need to investigate their education, niche, process, compensation structure, and experience to see whether they are a good fit for your needs. Equally important, it’s up to you to do a background check and determine whose interest the adviser is looking out for. No one else will do it for you. Here are two important steps you can take to greatly increase your chances of getting someone who will truly be looking out for you.

First, ask any adviser you deal with to sign a statement affirming they will act in the capacity of a fiduciary to you, meaning you will be a client, not a customer. A copy of this form can be found at here. Advisers unwilling to sign the form are not likely to be fiduciaries who will put your interests first.

Second, check the adviser’s background. If advisers receive any type of fee, they are held to a fiduciary standard automatically by the SEC. Still, it’s wise to check their background for any misconduct, which you can do through the SEC here. If advisers sell securities, mutual funds, private REITs, or limited partnerships and receive any type of commission, they will be regulated by FINRA. You can view their records for misconduct with FINRA’s BrokerCheck.

It’s important to check an adviser’s background because being found guilty of misconduct doesn’t mean they can’t actively be selling financial products. In a March 7 article, financial planner and writer Michael Kitces points out that over 73% of FINRA-registered brokers who FINRA lists as having a misconduct “are still employed a year later, despite the fact that such brokers are a whopping 5x more likely to engage in misconduct again in the future.”

Kitces explains that while just 7.3% of all FINRA brokers have some type of misconduct on their records, only about half of them actually lose their jobs and about half of those find employment with another firm. Additionally, it seems some firms have more of a culture of employing brokers with misconduct.

The top five brokerage firms with the highest (15% or more) concentration of brokers with misconduct are Oppenhiemer & Co, First Allied Securities, Wells Fargo Advisers Financial Network, UBS Financial Services, and Cetera Advisers. This is according to a working paper, “The Market for Financial Adviser Misconduct,” by Mark Egan, Gregor Matvos, and Amit Seru, business school professors at the University of Chicago and University of Minnesota. Geographic location also makes a big difference with the states of California, Florida, and New York having counties with much higher concentrations of brokers guilty of misconduct (15 – 30%) than states like Pennsylvania, Kansas, Iowa, Kentucky, and Vermont with the counties having the lowest concentration (2 – 3%).

Kitces reminds us that the “single greatest predictor of whether a broker will engage in misconduct is whether he/she has engaged in any prior misconduct.” For this reason, it’s crucial to make FINRA’s BrokerCheck part of your research before hiring a financial adviser. Before trusting any adviser to put your interests first, look out for your own interests by investigating the adviser’s history.

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