Selecting Investment Professionals

Check the Investment Professional's Background

Before you begin to work with an investment professional—even one who has been recommended to you by someone you know—it's essential to check his or her background. The good news is that the Internet has made this kind of information relatively easy to find. Investing a few minutes of your time up front may save you time, money and other trouble down the road.

 

Brokers and Brokerage Firms

FINRA BrokerCheck is a free tool that allows investors to check the professional background of brokerage firms, individual brokers, as well as investment adviser firms and representatives. It gives you easy access to the Central Registration Depository (CRD®), an online database of information about most brokers and the firms they work for, including a history of any past complaints or regulatory actions by securities regulators and criminal authorities.

Specifically, for individual brokers, you can use FINRA BrokerCheck to find:

  • Current employers;
  • A 10-year employment history;
  • Other businesses the individual engages in;
  • All approved licenses and registrations;
  • Qualification exams passed;
  • Criminal felony charges and convictions;
  • Investment-related misdemeanor charges and convictions;
  • Disciplinary actions and investigations by regulators;
  • Investment-related civil judicial actions and proceedings;
  • Most consumer-initiated complaints, arbitration proceedings and civil litigations;
  • Unsatisfied judgments and liens, bankruptcy proceedings; and
  • Employment terminations that follow allegations of certain misconduct or failure to supervise.
  • Any final sanction (such as bars, suspensions and fines) imposed by FINRA, the SEC or other federal or state regulatory agencies.

In addition, FINRA BrokerCheck provides the following information on firms:

  • Administrative information including address, legal status, types of business engaged in and direct and indirect owner/officer information;
  • A 10-year history of all felony charges and convictions, as well as investment-related misdemeanor charges and convictions;
  • Disciplinary actions and proceedings initiated by regulators;
  • A 10-year history of investment-related civil judicial actions and proceedings;
  • Bankruptcy proceedings;
  • Unsatisfied judgments or liens;
  • Summary information on arbitration awards; and
  • For former FINRA-registered firms, the date that the firm ceased doing business and, when appropriate, details regarding funds owed customers or other firms.

Even if an individual or firm does not have a history of reported problems, BrokerCheck can help you detect potential red flags. For example, you can find out whether an individual broker has switched firms frequently over a short period of time or whether the firm has changed its name often.

State securities regulators also have access to CRD and can sometimes provide more details about investor complaints. For that reason, it's often a good idea to check with your state securities regulator as well. A list of contact information is available on the website of the North American Association of Securities Administrators (NASAA) at www.nasaa.org.
 

Investment Advisers

Some investment advisers and their representatives appear in the CRD because they are also registered as or associated with broker-dealers. However, to do a thorough check of any investment adviser, you should ask for—and carefully read—the firm's registration document or "Form ADV."

Investment advisers must register with either the SEC or a state securities regulator, depending on the amount of client assets they manage. In general, a firm that manages $110 million or more in client assets files its Form ADV with the SEC while a firm below that threshold must register with the state securities agency in the state where the firm has its principal place of business. Although the SEC does not separately register individual representatives of investment advisory firms, many states do.

Form ADV has two parts. Part 1 has information about the advisory firm's business and whether they've had problems with regulators or clients in the past. Part 2 describes their services, fees and investment strategies. Before you hire an investment advisory firm, examine both parts of Form ADV, and then ask for an explanation of anything you don't understand.
 

In addition to asking the firm for a copy, you will be able to find an advisory firm's most recent Form ADV online through FINRA BrokerCheck or the SEC's Investment Adviser Public Disclosure (IAPD) website. You can also obtain information about investment adviser representatives through FINRA's BrokerCheck, the SEC's IAPD website or by contacting your state securities regulator.


Resources for Other Investment Professionals

Apart from FINRA BrokerCheck and the SEC's Investment Adviser public Disclosure database, you can get licensing information for other types of investment professionals as follows:

 

Type of ProfessionalLicensing Body or Regulator
AccountantState Board of Accountancy
LawyerState Bar Association
Insurance AgentState Insurance Commission
Financial PlannerConfirm whether the planner is licensed by or registered with the SEC, FINRA or a state regulator and check with that regulator

 

Understanding Professional Designations   

You might also be able to learn more about a professional's education and experience from his or her professional designations and membership in professional associations. Many organizations maintain databases of people who meet their criteria. You can check these lists to make sure an individual using a specific designation is properly credentialed.

A good place to start is FINRA's Professional Designations Tool. You'll find a list of credentials, the requirements the individual has to meet to be entitled to use the designation, and much more. But always bear in mind that not all designations carry the same significance or require the same amount of effort to obtain. To make meaningful comparisons, you will want to find out whether the granting organization requires continuing education, has a public disciplinary process, provides a means to check a professional's status and otherwise ensures that a professional designation is more than simply a string of letters.

Some designations require formal certification procedures, including examinations and continuing professional education credits. Other designations may merely signify that membership dues have been paid. Still others are simply marketing devices. For example, someone may call himself a 'senior specialist' to create or build rapport by implying a certain level of training on issues important to the elderly. But, that designation might require no special training, except perhaps in sales techniques targeting the elderly.

 

Finding Other Information

Background checks are only part of the homework you need to do when checking out a brokerage firm. It's also a good idea to find out if the firm is a member of the Securities Investor Protection Corporation, which provides limited protection of up to $500,000 per customer, including up to $250,000 for cash, if the firm becomes insolvent. SIPC does not, however, protect against losses resulting from a decline in market value.You can get more information about SIPC and what it covers at www.sipc.org.

 

 

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