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Due Diligence on Financial Advisors

How do you check on the background of a financial advisor?

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Transcription below:

Speaker 1 (00:00):

Speaker 2 (00:07):

Welcome back to 30 Minute Money, the podcast that delivers action-oriented smart money ideas and little bite-sized pieces. Today, joining me in studio, the man, the, the myth, the legend, the snappy dresser, Steve Wershing from Focused Wealth Advisors.

Speaker 3 (00:20):

Nice to see you, Scott. Nice

Speaker 2 (00:21):

To be back. Nice to see you too. And, um, actually, today is very interesting. This Yeah. Episode is very interesting because it's like the due diligence. What do you do? How do you check in a little background check on your Exactly. Financial advisor.

Speaker 3 (00:35):

Exactly. We talk all about financial advice, but we don't talk that much about advisors. But, you know, if you're looking for a financial advisor, you know, I, a lot of people worry about, you know, so how do I check into this person? How do I, how do I know if they're good? Right? They, and one of the challenges, of course, two challenges. One is that every successful advisor, good or bad, is a great salesperson. And so just because they say something that makes sense or says something that sounds really attractive, doesn't mean that, you know, that doesn't mean that they're a good, good advisor, right? Mm-hmm. , they're not, not necessarily. So, you know, you wanna do a background check on 'em. The other challenge is that the traditional way that you would check into folks doesn't necessarily work that well.

Speaker 2 (01:17):

Can't just Google your name and find out all the dets.

Speaker 3 (01:19):

Well, you could, but you know, if, like, if you're gonna hire a moving company or a contract or somebody like that, you might go to, you know, Yelp or, uh, Angie's List, right? Or, you know, well, and, and there, there for a few reasons. You know, there's just not a lot of information about financial people on those sites. One, one of the reasons is that up until very recently, we were, uh, we were prohibited by regulation from, from using testimonials. So, you know, lots of companies have, you know, quotes on their site about satisfied customers and that kinda stuff. And up until just within the past couple of years, that was outright illegal, uh, for investment advisors. Now they changed the marketing rule, um, but everybody's still working on coming into compliance with it. So it's still a little thin out there. It's still a little, you can't really get a lot. So that's why I want, I thought it, I thought it would be really helpful to talk about if you do want to check into somebody, where can you go and find out information about people? Yeah.


So do tell. Yeah. Well, so the big one, the, the, the, the granddaddy of all of 'em is, um, is the federal government's, uh, registration, um, site. So everybody who's in the investment business, whether you be, uh, a stockbroker or an investment advisor, or, you know, anybody who's regulated by any of those things, um, has a, a listing in what's called the central registration Depository. That's the, um, that's the database that has all the securities licenses in it. If you are fee only, if you're a, an investment advisor that only does stuff by fee, there's a related one from the S e C called the Investment Advisor Registration Depository. But, um, but you can get both of them through the same public access website. And that website is broker check. So if you go to finra.org, that's f i n R a.org, that's the financial industry regulatory authority.


That's the quasi-governmental agency that the SS e c has delegated the policing of the investment business too. Mm-hmm. , um, you, you can see right across the, at the top of the page, there's a menu, and one of the choices is broker check. And even if the person is not securities licensed, even if there are just a fee only advisor, they'll still show up in there. If you click on it to get more information, it will take you over to the, the investment advisor site. But they're still listed there. So what you do is you go there, you put in the, per the name of the person that you're looking for, the, ideally the city that they're in. Um, that's optional. But if you're, you know, considering Jack Smith as a financial advisor, you're probably gonna wanna put at least the city in, um, otherwise you're gonna have good call a million Jack Smith to sort through.


Um, but you go in there and, and, uh, and you click on it and you'll, everybody will come up and you pick the one that, that, um, pick the one that you're interviewing, and you click on that box for the details, and it will give you all kinds of information about the person. It'll give you how long they've been in the business, which firms they've been associated with, uh, which exams they've passed. You know, it tells you all that stuff. But the big, the big thing that you wanna look for is a, is a box on the left side of the page, and it says disclosures. So anything bad that's gone on with somebody, we, you know, we are a euphemistic business, as, you know, we've talked about that before mm-hmm. , so we don't say things that sound really scary. Mm-hmm. . Um, so in our business, you know, if something, if something really bad is in there, it's called a disclosure event.


And if there is a disclosure event, it will be in that yellow box. And if you click on the yellow box, it will drop you down to the, the part of that page that has the individual disclosures laid out. Now, the disclosures could be things like, um, client complaints, customer complaints. It could be, um, lawsuits that they've been in. It could be regulatory activities, you know, so if the regulator penalized you for something, it would be a disclosure event. And certain financial, certain financial things, if you've declared bankruptcy or if, you know, some of those kinds of things are disclosable. And so those would all be disclosure events. So what you really wanna pay closest attention to is if the person has a disclosure event. Um, that's actually a pretty big deal. And, you know, I, I, I can't tell you statistics 'cause I don't know, but you know, most of the people that I see, most of my colleagues and whatnot, they don't have any disclosure events. And that's what you wanna see. You wanna see somebody who does not have disclosure events. Right. Um, and if you, but, and so if there is a disclosure event, you wanna be careful about that. Now, some of them, you know, it's hard to be in this business for a long, long time without somebody making a complaint about something. You know, invariably, even if you provide good advice, that was my question, was how,

Speaker 2 (05:56):

How do you know, can the general public make a complaint that goes up there and maybe you can't refute it, or something like that? Yeah. So like, my Yelp rating went down because someone decided that they didn't like exactly how I did something, and it's not even accurate.

Speaker 3 (06:11):

Right. Well, and here's the thing. Um, if someone like com complains or starts of an arbitration or something like that, even if it doesn't have merit, um, there, it, it can, it can be difficult and expensive to get it off of there. One, once something is disclosed, you, you can, there's a process called expungement that you could go through to remove stuff, but it's incredibly expensive. It takes a long time. It's a, it's a, you have, you basically have to sue to get it off. And so, you know, if you, if there is a disclosure event, it, you should look at 'em, you should look at what they are. And if somebody says, well, you know, he recommended this, and I don't think it was good. And, and there's always, there's always a space for a response from the, from the advisor. There's always a place for a firm response or the person's response.


And so it, you know, if it says, um, he may, he gave me a really bad recommendation and, and it went and it lost a whole bunch of money, and you see that the claim is for $5,000 and below that you can see that, you know, we assess this, you know, we think the claim is without merit, and then, and there was no real resolution to it. You know, you'd rather not see that kind of thing. But that's relatively harmless. Yeah. What you, what you want to be more attentive to are arbitrations. I mean, if, if, if someone was arbitrated against successfully, that's a bad sign. Yeah. And if you, and you wanna look at particularly closely at regulatory actions, those, those are pre actually a pretty big deal. I mean, you know, there are a lot of complaints among the, you know, consumer groups and the public that, you know, well, these rogue brokers are running around and they're not getting penalized.


And, you know, there's, there's an active discussion about that. Suffice it to say that it, it, it's gotta go pretty far before a regulator steps in and takes, takes, takes action on something. And so if you see something like a suspension, that's a really big deal. I mean, you really have to go pretty far outside the lines for the regulators to step in and take away your license for a period of time. Yeah. So even if it's a short period of time, most suspensions are like one month, three months, maybe six months. It doesn't sound like a lot, but if you get suspended at all, it's a pretty big deal. And you, you, you know that that's something you should know about before you, before you get into a say, before you get into a relationship. But, you know, you could even check out your current advisor and just make sure things are still good.


So, so that's the big one, is broker check is to go there. There are other things that you go, the other thing I wanna say about broker check is that you can see which firms they've been with. And, um, if you leave a firm, they're actually four, four way four things that you can put on a licensing doc. So when somebody gets somebody leaves a firm, there's a form that has to get filed with the government. And there are four levels of reasons that you could leave. One is voluntary. That means, you know, I don't wanna be with this company anymore. I wanna be with that company. You know, I've resigned from my firm, I joined that firm. You know, they check off the box, voluntary, nobody caress about that. It's just, you know, continued business. There are three others that will show up as disclosure events.


There is permitted to resign, there is discharged, and then there's other, uh, permitted to resign means that the firm was looking into something. They haven't proven anything, they haven't made any conclusions, but they were actively investigating something. And rather than go through that, you chose to leave and go to a different firm, permitted to resign is not a positive thing. No permitted to, permitted to resign means there's a cloud over you. Like, so that's different than voluntary. If I, if I voluntarily resign, everybody's okay, you know, you can go, uh, but if, if they're looking into it and you just wanna leave before that thing is concluded, that's a permitted to resign. The other big one is discharged. Discharged means terminated for cause and that means that you are fired. And so that's a bad thing. If, if you, if you see that someone was discharged from a firm, you probably wanna look into it more because, uh, it means that not only did they look into something, but they found something that was wrong and you stepped outside the lines and it was enough that they, you know, that they decided to, to fire you.


Right. So that's, so those are some of the things that you wanna see in, in those disclosure areas. So the one place that you can go for everybody is that, uh, is that finra.org and look at broker check. But there are some other places that you can go to to, to, to investigate stuff. And, and most of those revolve around whatever professional designations they have. So we'll talk about a couple of those here. The big one, of course, in financial planning is the C F P, the certified Financial Planner. And if you are a certified financial planner, that means that you need to be in compliance with the certified financial Planner board of standards. And they have a website that you can go to. So if you go to cfp.net, um, you can, um, you can look up anybody who is a certified financial planner and you can read all about their record right there.


One of the big things, frankly, is that you can confirm, uh, whether or not they are actually a cfp. And so if you go to cfp.net/verify-a-cfp-professional, because we like long URLs, it'll be on your screen and in the show notes, it'll be in the show notes . Um, but if you go to, uh, verify a professional, um, there, um, sometimes that's better than search, because if somebody is claiming to be A C F P and they're not A C F P and you search for A C F P, they won't turn up. Mm-hmm. But if you go to verify a professional and you type their name in, it will tell you, um, whether they are a C F P or not, and if they're in good standing. Yeah. Can

Speaker 2 (11:52):

You, if you're a C F P, can that run out? Do you have to go for license licensing every year or every so, so often, or?

Speaker 3 (11:59):

Yeah, so you have to renew it every couple of years and, and part of renewing it is keeping your nose clean and not doing bad things. Um, and part of it is, um, um, you know, recommitting yourself to the code of ethics, and part of it is keeping up with your continuing education. So CFPs have to take a certain amount of continuing education every year to maintain their C F P to make sure that we're all still current with our, with our knowledge. Yeah. And so, yes, there are ongoing requirements if you wanna remain, and you also have to remain, you know, consistently engaged in the provision of advice to clients. You know, so if you take a couple of years off, you could lose your C F P because they require that you be active in the actively providing advice to people to continue to be A C F P.


Um, another one is, uh, uh, people who came up through the insurance side of the business could be a C L U or a C H F C. Uh, C L U is a charter life underwriter, and a C H F C is a chartered financial consultant, um, that those marks are governed by the American College. And so you can go to the, um, the American College, but it's, um, the website is your advisor guide.com, and you can go look for designation check, and you can, uh, the same as same as verifying A C F P. You can go there, you can put the name in, and it will pop up, and it will tell you if they are A C L U or A C F C H F C or both. And if they're still current on that. And similarly, the last one that we'll cover is the C P A. And if, if, you know, if someone is claiming to be a, a, a, a certified public accountant, you can go to the ai cpa, which is the National Organization for CPAs, or you can go to CPA verify.org. And again, you can type in their name and, you know, you can get the status, you can get a little bit about their background. You can see if they're still current.

Speaker 2 (13:52):

Yeah. So handy stuff. Very important. Yeah. I mean, if, if I'm gonna contact someone to play with my money. Exactly. Um, you know, I wanna make sure that they're legit.

Speaker 3 (14:01):

Exactly. Now,

Speaker 2 (14:02):

Um, for the, for the first one, for the, uh, broker check, is there, is there something that explains to the lay person what all of them mean? Or are they, are they like the disclosures? Are they all pretty much self-explanatory? Or do you have to do any investigation to figure out what they are?

Speaker 3 (14:20):

They're, they're pretty self-explanatory, but there are, there are areas in that site will, that will explain some of the terms. So, perfect. There, there, there's some help on that site, but they're also, they're, they're pretty, pretty self-explanatory.

Speaker 2 (14:31):

Yeah. So I, you know, I, I would hope that if you're searching for, uh, financial help, that you would actually research who, who

Speaker 3 (14:40):

You're gonna work with. It's always a very good idea to check it out before you send them all your money. Your retirement is at risk, not

Speaker 4 (14:50):

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Speaker 2 (16:13):

Doing your due diligence and doing some research is not a bad idea. What's your 30 minute action item?

Speaker 3 (16:19):

30 minute action item. Go to broker, check and put in the name of your financial advisor. Make sure that they've got a nice clean record.

Speaker 2 (16:26):

Seems easy enough to me. Um, thanks for listening and watching 30 Minute Money. You could find it at 30minute.money, and from Roc Vox recording and production in Bushnell's Basin, and for Steve Wershing of Focus Wealth Advisors. We'll see you next time on 30 Minute Money.