As the SEC accuses the first broker of violating the new investor protection rule, here’s how to find a good financial advisor

Finding a broker or financial advisor you can trust can sometimes be a daunting task.

That’s especially true when investors see sensational stories of brokers fleeing police underwater in an underwater escape or faking their deaths in a plane crash. Then there are the high-profile scammers like Bernie Madoff, who ran the nation’s largest investment scam in history — a Ponzi scheme that cost tens of thousands of investors up to $65 billion.

And of course there are less sensational, but still noteworthy events. The Securities and Exchange Commission on Thursday charged a broker — Western International Securities Inc. — and five of its brokers with violating a new rule aimed at increasing the protections of investment advice given to consumers.

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The brokers allegedly sold more than $13 million in high-risk, unrated bonds to retirees and others, despite the bonds’ illiquidity and speculation making them unsuitable for those investors, according to the SEC press release. The broker did not respond to a request for comment.

It is the first time the SEC has filed a lawsuit related to the Best Interest regulation, which the federal agency issued in 2019 and required firms to comply by June 2020. Overall, the rule requires brokers and firms in general to put a client’s interests ahead of their financial or other interests in making an investment recommendation. You must share some of the logic behind a recommendation and disclose conflicts of interest.

According to the Financial Industry Regulatory Authority (FINRA), there were 690,000 registered brokers and financial advisers in 2021. Here are some tips for consumers to find one they can trust.

See warnings in regulators databases, online searches

There are some surefire warning signs that a consultant you’re considering may not be a good choice.

Financial regulators have online databases that consumers can refer to for background information on specific individuals and companies. The SEC has one, the Investment Adviser Public Disclosure website, for financial advisors. FINRA’s resource, BrokerCheck, lists brokers. (A person or company may appear in both.)

First, verify that the person appears in either system and is licensed or registered with a company.

According to Andrew Stoltmann, a Chicago-based attorney who represents consumers in fraud cases, this means they meet a minimum set of credentials and background to work in the industry.

“If they’re not, that’s the over red flag,” Stoltmann previously told CNBC. “If not, it could be a guy calling from his mother’s basement.”

Prospective clients should also google the name of the advisor or agent to see if any news articles appear about previous leaks or court cases. If so, it’s another bad sign. The regulatory databases also list any disclosures, complaints, arbitrations, or settlements in which the individual is a party.

Experts recommend checking for nefarious financial behavior such as sales abuse practices, inappropriate referrals, and excessive or unauthorized trading.

Check bank statements for other warning signs

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But just because these warning signs aren’t initially found doesn’t mean consumers should let down their vigilance. There are other signals to look out for once you’ve decided to entrust your money to an advisor.

One of the lessons learned from Madoff’s multibillion-dollar scam was to make sure your money is held with a reputable third-party custodian like Fidelity or Charles Schwab, Stoltmann said.

That makes it much more difficult for an advisor to steal money or take advantage of a client since the assets aren’t held in-house and clients don’t write checks to the advisory firm, he said.

Think of it as a firewall like two-factor authentication — the custodian has specific procedures in place for withdrawing funds, which often involve contact with the customer, Stoltmann said.

Customers can verify this information on their regular bank statements.

Additionally, losing money is not necessarily a red flag, especially when it occurs in a declining market.

However, according to George Friedman, an associate law professor at Fordham University and a former FINRA official, it could be a bad sign when an investor’s portfolio is way below standard benchmarks for stocks and bonds.

“Eventually you start asking questions,” he told CNBC.

Hyper-trading activity, as detailed in an investor statement, is another telltale sign. Such account churn incurs fees and commissions for advisors, but harms the client financially.

Proprietary investing — for example, owning a mutual fund operated by your brokerage firm — isn’t necessarily a sign of fraud, but it can be a sign that an adviser or firm is making money at your expense, Friedman said.

“I would check bank statements every month,” he said. “If you see something funny or unusual, that’s a flag.”

Of course, investor statements could be manipulated to hide such information.

Ask questions about investment recommendations

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Unsatisfactory or delayed responses to customer questions should prompt customers to escalate their case to the company’s compliance department.

A request to communicate outside of a consulting firm’s official channels, such as B. company e-mail, is also an important warning signal.

And, importantly, understand your investments; Invest your money only with reputable asset and fund managers, say experts. If you can’t understand it, it’s a bad sign, as is an investment that seems too good to be true.

Micah Hauptman, director of investor protection for the Consumer Federation of America, suggests asking a broker or adviser to verify in writing what they recommend and why they didn’t recommend a simpler, less expensive option.

“If they can’t provide a simple, specific, clear, and concise answer as to why this is unlike anything else on the market based on product cost and quality,” then that could raise some red flags,” Hauptman said.

Look for a fiduciary paid advisor

Brokers generally remain a lower-cost option for consumers who rarely trade stocks and mutual funds and hold them for long periods of time, compared to advisors.

According to consumer advocates, consumers who want continuous, holistic advice and want to reduce the risk of conflicts of interest as much as possible should consult a paid financial advisor.

You can look for such advisors on networks like the National Association of Personal Financial Advisors, the Garrett Planning Network, the XY Planning Network, and the Alliance of Comprehensive Planners.

Such advisors must have a basic competency such as the Certified Financial Planner, or CFP, the term for financial planners, and only receive flat fees for their hourly service, monthly subscriptions, or fees based on the assets they manage for clients, Ron Rhoades, himself CFP and director of the Personal Financial Planning Program at Western Kentucky University, told CNBC.

“This is the easiest way for a consumer to find someone who is definitely on their side,” Rhoades said.

Consumers should interview at least three different advisors after conducting a search to ensure the right fit, he said.


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