Investor Protection Clinic - Student Blog

Check Yourself and Protect Your Wealth

Two friends are walking together when one asks, “Do you want to go out to eat at that Thai place around the corner?”

—“Oh yeah! I saw that place the other day.  Will you look up reviews?”

“Sure,” says the first, as he pulls out his smart phone. “Ooh, 4.5 stars with 137 reviews. It looks like a great place.”

—“Great. Let’s go.”

Since the advent of online shopping and websites like Yelp, we look up reviews and ratings for almost everything we do or buy. So why don’t we research who we invest our life savings with? Perhaps, it’s because researching restaurants and products we want to buy is easy and we know how to do it, but information about investment professionals is not as readily available. And to top it off, most of us don’t know what we are looking for nor what to do with the information we find.  This post will give you the tools to begin your research and a small framework for you to put your research into perspective.

The Financial Framework

To understand where to look and to know what is important for your research, you should understand a few basics about the industry and how it is regulated. To begin, there are many different persons that may hold themselves out as financial advisors. This post talks about two of them and their regulating authorities. 

Registered Investment Advisors

A registered investment advisor gives you investment advice — like a good retirement plan or different strategies for saving for college — and they are registered with either the state securities authority or the Securities Exchange Commission, more commonly known as the SEC. Importantly, courts have established that a registered investment advisor has a fiduciary duty to their clients, meaning they must give advice that is in the best interest of their clients and disclose all conflicts of interest.

Broker-dealers

Another type of self-described financial adviser is a stockbroker associated with a broker-dealer. Broker-dealers firms buy and sell securities. Basically, they act as a broker when they buy and sell on behalf of a client, and a dealer when they buy and sell for themselves. In order to legally sell investments, stockbrokers must be licensed in any state where they sell securities. They must be associated with a broker-dealer firm that is a member of the Financial Industry Regulatory Authority, or FINRA. FINRA is the self-regulatory entity made up of member broker-dealers that issues licenses to broker-dealers. FINRA sets its own rules, but also follows the rules set out by the SEC. However, unlike registered investment advisors, stockbrokers may not always owe their clients a fiduciary duty. Whether a stockbroker owes their client a fiduciary duty depends on the state. For example, Nevada recently passed legislation that creates a fiduciary duty for a stockbroker giving financial advice to clients. Similarly, other states, like California, have created a fiduciary duty for brokers through common law. Meaning that there is an important distinction across the states and the industry: certain industry actors may not always have your best interest in mind when they suggest an investment. The main requirement for broker-dealers recommending investments is that the investment is “suitable” for their client based off several factors such as age, time to retirement, risk tolerance, and the client’s other investments.  This does not mean that the broker-dealer must believe that it is the best option to meet a client’s financial goals.

There are also some investment professionals that are dual registered as investment advisors and stockbrokers.

Regulatory Oversight

Together, FINRA, the SEC, and the States oversee the securities industry. If problems arise, your options may depend on what state you live in and the particular type of financial advisor that assisted you. For example, there may be mandatory arbitration within the FINRA forum for a dispute between a client and their broker; or the State may step in to take action and penalize a bad actor by suspending their license, placing them on heightened supervision, issuing a fine, or some other regulatory action. 

What does this mean for me and my research?

When you are researching your investment professional, it is important to make sure that your investment professional is licensed both by the state and the appropriate regulatory body.  Similarly, it’s good to know whether the individual has been punished or had arbitration awards issued against them for misconduct, such as fraud or selling unsuitable products.  You wouldn’t go to an unlicensed doctor, nor would you use a lawyer who has been known to cheat their clients. You should also be careful with who you trust to handle your finances and financial future. Never work with someone that is not licensed.

You should also investigate the firm any financial advisor works for.  Would you want go to a firm that was known for cheating clients or allowing their employees to cheat clients? It’s important to know what misconduct, suits or other administrative actions have been taken against the firm and the investment professional.  If something goes wrong, you also want to know that a reputable firm stands behind the financial adviser.

Important Investment Tools

So, now what? You understand the basics of the industry and know what to look for. Where do you look for the information? The Yelp page or Google reviews may not be the best place to look because these reviews are likely highly subjective and more often than not from people who are very happy or very upset. It’s better to have an objective source of facts so you can decide.  Luckily, there are a few resources out there to help. 

The first is https://investor.gov/. Investor.gov should be one of your first stops in researching your investment professionals and investments because it has a wealth of easily accessible information and is created and supported by the SEC. Meaning the website doesn’t have a proprietary interest in conveying the information, so you can count on the information being accurate and objective. Along with information about investment professionals and investments, the website also provides investor tools — like 401K and IRA minimum distribution calculators and compound interest calculators — as well as investor warnings and featured information. In addition, Investor.gov provides a forum for asking questions and submitting complaints. 

The second is the Investment Adviser Public Disclosure website, available at https://www.adviserinfo.sec.gov/IAPD/default.aspx.This website is the search engine that Investor.gov uses to search the database for your investment professional. And so it is more barebones, and direct.

The third resource is https://brokercheck.finra.org/. FINRA runs BrokerCheck.  It gives a snapshot of the employment history, licensing information, regulatory actions, arbitrations, and complaints against any broker-dealer, whether the individual investment professional or the firm. BrokerCheck provides a graphic, easy to read timeline of an investment professional’s history and has red flags that appear on the time line. Although the red flags on the timeline are helpful, the timeline may not tell the whole story. For example, an investment professional may have gotten other red flags removed from their record, or an investment professional was mentioned in an arbitration claim but did nothing wrong.  So, reviewing the “Detailed Report” link in the top right of each BrokerCheck report and conducting additional research is a good idea.

Fourth, is https://www.compliance.ai/. Compliance.ai uses computer models to compile regulatory information from sources like Federal and State regulatory agencies, award enforcements, regulatory publications, and executive orders. The website creates graphs, posts studies and editorials, as well as the regulatory information of both investment professionals and firms. Please note, compliance.ai is a pay to use site, however it has a 30-day free trial.  In addition, the website is more sophisticated than investor.gov or BrokerCheck, and so if you are turned off by sophisticated websites with industry terminology, this may not be the best site for you to use on a day to day basis. That being said, it is a great resource and should be considered when doing your research.

Fifth, is EDGAR, available at https://www.sec.gov/edgar/searchedgar/companysearch.html. EDGAR is a search engine on the SEC website that allows anyone to search the public records of companies.  This does not provide for a method to research investment professionals, but it provides a forum to research a company’s finances as well as the public disclosures like an investment’s prospectus (essentially the explanation of what the investment is and any risks involved or other disclosures that are legally required to be disclosed).

And finally, your state regulator is an invaluable resource for researching your investment professional.  A link to the contact information of each state regulator is available at http://www.nasaa.org/about-us/contact-us/contact-your-regulator/. Each state varies in how it regulates securities, so do an internet search to find your state’s regulatory agency.  They will have a website and may have additional information relating to investor protection and researching your investment professional.

 

Seller Beware

Ultimately, much of the financial industry still operates on a “buyer beware” standard. Investors need to protect themselves by doing research, understanding who they are dealing with, and what the investments are that the investor is buying.  Franklin D. Roosevelt argued that we should expand the buyer beware doctrine and “let the seller also beware” by putting the burden of telling the whole truth on the seller. Unfortunately, you may not always get the whole truth in a sales pitch, but going in having done your homework, armed with knowledge and ready to “trust, but verify,” you can take control. Stay informed and protect yourself.

More about Eric Duhon
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