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Advisers Brokerages Fraud Investor Professor

Resources for Checking Out an Adviser or Broker

You can find out a lot from a Google search, but BrokerCheck and the SEC’s IAPD databases are treasure troves of disclosure information on investment advisers and brokerage firms.

by Ryan Reeh | April 2020

Many investors trust their investments to professionals, but before entrusting your portfolio to an individual adviser or brokerage firm, it is important to research their background. Here we list internet tools that are designed to help.

General Online Search

The first step should be to do a Google search on the broker or adviser in question. The top search results will probably lead you to marketing or profile information that the individual or firm posts, so you will need to dig further. Try adding their name plus “complaints” or “fraud.” Multiple searches can help you discover what the adviser may not want you to see at first glance.

You’re not just looking for complaints with these searches, you’re looking for information that conflicts with the impression or profile that the adviser is presenting. For example, an adviser who claims to have 20 years of experience managing portfolios but upon further research is found to have graduated from college a few months ago is a definite red flag.

If you find information about the adviser that is different from how they present themselves, ask them why, and if you’re not satisfied with their answers or if it seems suspicious, trust your instincts and seek out a different adviser or firm.

FINRA’s BrokerCheck and the SEC’s IAPD Database

Beyond this, you should also use the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck, a free database containing summaries of brokers’ employment histories, certifications and licenses, history of regulatory actions taken and/or complaints filed against individuals or their investment firm, including violations, complaints and related criminal felonies. BrokerCheck works in tandem with the U.S. Securities and Exchange Commission’s (SEC) Investment Adviser Public Disclosure (IAPD) website. The IAPD website handles SEC- and state-registered investment advisers and individuals associated with them, while BrokerCheck covers individual brokers or brokerage firms, but the two databases cross-reference each other. Between the two, you can review information on more than 1.2 million financial professionals, including 625,000 active individuals.

BrokerCheck lets you know when the individual was registered with FINRA and state securities regulators and if they have filed any disclosures, including how many and what type of disclosures. Disclosure information includes: criminal charges and convictions; regulatory actions; personal bankruptcies and unpaid liens; customer disputes, including allegations, damages requested and granted and any additional comments; how many exams they have passed; how many years of experience and firms they have worked at; current employment; which states and territories they have licenses for; broker registration history; and contact information for the firm where they currently operate. For firms, information about types of business also appears, as well as who the direct owners and executive officers are of the company. In addition, detailed reports on both individuals and firms are available in PDF form.

Disclosures do not necessarily indicate wrongdoing, as complaints can be dismissed by arbitrators. However, multiple disclosures along the same lines could be part of a pattern. It is important to consider the allegations, the amounts involved and any comments that may reveal the nature of the claims being made or the conduct of the adviser. For firm-level disclosures, BrokerCheck includes PDFs of regulatory activity, arbitration award history and other company information.

It should be noted that these tools, though designed to help investors, may not tell the full story behind a broker’s or firm’s past. FINRA allows individuals and firms to dispute the BrokerCheck record, which would be addressed in an arbitration forum. Claims that are found to be unfounded may be expunged from the record. BrokerCheck is updated daily and, while the data is available to the public, control of it remains tightly in FINRA’s hands. The terms of use ban firms from using the data for commercial benefit.

Keep in mind that a record with a lot of disclosures does not necessarily imply misconduct. And similarly, a clean record does not imply a perfect background check.

BrokerCheck also does not contain information on civil litigation not involving investments, or criminal records other than felonies or investment-related misdemeanors, such as theft or “breach of trust” data.

Two Additional Resources

Another resource is your state securities regulator, located through the North American Securities Administrators Association (NASAA). These regulators keep records on the investment professionals licensed in their state and may yield more information than what is searchable on BrokerCheck or IAPD.

Lastly, the SEC’s website also tracks registered investment advisers and exempt reporting advisers month to month, dating back to 2006 (www.sec.gov/help/foiadocsinvafoiahtm.html). For those interested in this data, this spreadsheet contains the information submitted on Form ADV, which all investment advisers must file with the SEC and their respective state securities regulator.

Conclusion

While not foolproof, using these resources will help you make a more informed choice when hiring an investment adviser or brokerage firm. A little due diligence goes a long way to protecting your investments from unsavory scams and schemes.

Discussion

Barry Estell from California posted over 6 years ago:

It should be noted that any broker with relatively modest resources can have most serious complaints and misconduct alleged by customers "expunged" from his or her record. The last I checked, one broker had over 20 expungements. When brokerage firms settle fraud complaints against brokers, they also routinely require an agreement to not contest an expungement, so that the fraud complaint will disappear with he payment of a few thousand extra dollars to the industry-friendly arbitrators on FINRA's payroll.


Arnie Lamb from California posted over 6 years ago:

Two years ago, my consultant at Schwab moved to a new assignment, and, after reading an article on using BrokerCheck, I ran the new consultant's name and found he was clean as a whistle. On a whim, I checked the name of an independent adviser that I had left in 2002, because I disagreed strongly with his recommendations. Up popped a big red circle with a red diagonal line through it, confirming my earlier decision. Just remember, the record discusses fraud-related issues, not investment recommendation skill.


Ted from Calif. posted over 6 years ago:

I used FINRA once to check out a broker a friend asked me about and got a hit for a string of complaints. I do not trust any broker to be dealing in my interest rather than their own and frankly I do not think anyone should. In this day and age if you need a broker and their commissions to invest you probably should not be investing in the market.


Beaufort Lancaster from Texas posted over 6 years ago:

I believe the best advisor would be a fiduciary advisor, i.e, one required by law to act in the client's best interest rather than their own. Brokers and fiduciaries both have to make a living at their profession, but I'd prefer to pay purely for tenable advice rather than have to second guess how commissions might influence advice and how mentally to adjust for that.


MICHAEL S from CA posted over 5 years ago:

As a now retired RIA myself and an AAII Chapter prez I knew about the SEC filing databases, and used them to check out potential speakers for our Chapter. A good independent source.


BARRY J from TX posted over 5 years ago:

Ethical capacity is the most important topic when doing business with anyone. PERIOD. It increases in significant when you plan to do turn over your financial decisions about how your wealth is managed. Ask yourself, why does anyone want to be a financial advisor for someone else? Why would someone who represents themselves skilled in making money not just manage their own money? Why would they seek 12.5% commissions from when they can make 100% commissions with their own money? Remember there are NO GUARANTEES their advice will be produce the results you expect. This article highlights the basics. The comments provide the insight you need. The ethical capacity of the 625,000 practicing RIAs are normally distributed (a bell curve) like all human traits. Your experience tells you that someone with average ethical behavior is not the right one for this job. The ones you might consider are the 1% who are at least 3 sigma down the right tail. Thus, there are 6,250 or less possible candidates to consider. This means you need to be much more diligent than this article recommends. The internet permits anyone to check out many much more reliable indicators of trust worthiness -- e. g., credit records, bankruptcies, business records, past customers, driving records, divorces, etc. Even the "manufactured" images on social media and LinkedIn give you the ability to peer into someone's working history and they provide "references" that may help you estimate a person's character by reviewing the people they "friend" or whom they seek to have "links" with. Don't forget the "I love me" photos. If you see a parties, a McMansion, or a yacht, ask yourself whose money paid for that lifestyle? There is a lot of noise in any data set. The data sets described are no exception. It's literally a crap shoot. The question is: Is the shooter rolling fair dice? Caveat emptor.


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