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When working with a financial adviser, your best defense is a good offense.
Before you even hire someone to advise you, you should protect yourself by doing some basic research, said Jason Steeno, president of CoreCap Investments and CoreCap Advisors. “Do your homework upfront. Vet an adviser before you hire them,” he said. “Talk to existing clients. Ask for testimonials or references. Don’t skimp on the homework.”
He compared working with an adviser to working with a salesperson. “Don’t turn a blind eye to the things that would be a red flag in a sales situation in any industry. Are they asking about your situation and trying to learn about what you need, or within five minutes are they pushing high-pressure sales tactics?” he said.
“An adviser that’s running a good business would dig into your situation and learn about your hopes and dreams,” he added.
Steeno recommends checking the government’s Investment Adviser Public Disclosure website to determine how long a person has been in business, how many firms they’ve been employed by and whether they have been involved in any disclosures, disputes or complaints. You can also take advantage of BrokerCheck from Finra, Wall Street’s regulatory authority.
Read: Finding a financial adviser is like dating — you don’t need to stick with the first person you meet
After looking at an adviser’s education and professional credentials, talk to them about their fee structure and see how upfront they are about how they get paid, said Kate Wilkinson, senior vice president and senior client adviser with Spinnaker Trust.
“I’d be wary of someone who charged an exorbitant fee,” Wilkinson said.
Hiring a certified financial planner provides an extra layer of confidence that certain standards and ethics will be upheld, said Tom Sporkin, managing director of enforcement at the nonprofit CFP Board. “We take steps to uphold a code of ethics. A CFP is a fiduciary who must work in the best interest of the client,” he said.
“The most important thing is to make sure the person is a CFP. That means someone is looking at them and they must uphold the highest standards,” he said.
Another important thing to have is trust, Sporkin said.
“Most financial planning is about relationships. There has to be trust. A CFP helps align values with goals and help them increase satisfaction of their life,” he said. “By understanding their needs and asking the right questions, you can build the right financial plan.”
If you believe your CFP has acted unethically, you can file a complaint at CFP.net. The CFP Board has a process for handling allegations of misconduct and has a commitment to upholding certain standards in a way that is credible to the public and fair to those whose conduct is being evaluated.
Among the 95,000 CFPs in 2022, there were 907 investigations opened by CFP Board enforcement. There were 15 interim suspension orders, 115 public sanctions and about 200 cautions issued that year, according to the CFP Board.
Pay attention
Even after you’ve hired an adviser, stay vigilant.
“Pay attention to what’s being done with your account,” Steeno said. “There’s some element of trust involved, but in cases of fraud or wrongdoing, at some point an adviser took advantage of that trust. Look at your statements, look for anomalies in statements, make sure you’re meeting with an adviser on a regular basis. Look at the custodian statement, not just a consolidated statement an adviser might draw up for you. Look at the official statement and make sure all the statements align.”
He added: “Any adviser out there should be willing to answer questions and explain a strategy. If they aren’t, then that’s a red flag.”
Advisers also must be willing to explain their strategy in a way that’s understandable.
“I would want someone who can lay out scenarios before you jump into an investment,” Wilkinson said. “If someone couldn’t explain the ‘what ifs,’ then that would worry me.”
If something goes wrong
If you do run into problems with an adviser, go to the branch manager or compliance officer of the financial institution to try to resolve the situation, said Joseph D’Avanzo, a senior member of the national excess trial team and chair of complex litigation at Coffey Modica.
The Securities and Exchange Commission, as well as state regulators, also oversee financial relationships between advisers and clients.
“These agencies are very responsive. You’ll get quite a response from a regulator, because the consequences are very serious. A small investor may not get as much of a response as a large institution filing a complaint, but complaints are still taken very seriously,” D’Avanzo said.
Usually when launching a relationship with a financial adviser, you agree to submit to arbitration to resolve disputes, D’Avanzo said.
An investors’ bill of rights through the North American Securities Administrators Association allows people to verify who they’re working with, receive statements, have investments reflect their risk tolerance and other privileges, D’Avanzo said.
“Advisers can get into trouble if an investment is not fully explained or it’s riskier than the risk profile of the investor.” he said. “It can happen with older investors, where the risk profile might be lower and an adviser might suggest something risky and that’s not appropriate.”
