Advisers – Keeping Them Honest

by DAVID NOVAK

It never ceases to amaze me how many articles I continue to read about investors being fleeced by unscrupulous financial advisers. In an age where information is so readily accessible, why does this continue to happen?

The good news is that investors can do their homework on any prospective adviser. The first place to look is Broker Check (brokercheck.finra.org). This site contains information on every adviser who either currently holds or has held a securities license. The summary page for advisers lists their firm, years of experience, and if there have been any
disclosures against them. The more detailed report also includes further information such as securities licenses held, specific states where the adviser is registered, and general employment history.

It also includes more detail on any disclosures, if applicable. This is important, since all disclosures are not created equal. A disclosure can contain anything from a personal
bankruptcy to a client complaint about an unsuitable investment. A brief description
accompanies each disclosure, which can often be useful for context of the particular situation.

The cousin to Broker Check is Adviser Check (adviserinfo.sec.gov), which details all the same basic information for investment advisers and investment advisory firms. In a very
general sense, regulators consider a broker to be a financial adviser who charges commissions, and an investment adviser to be one who operates on a fee basis instead of commissions. Advisers who are compensated by both commissions and fees will appear on both sites.

The other important document found on Adviser Check is the Form ADV, which is the document that each advisory firm must file annually to outline all aspects of its business. This will have information on everything from client fee schedules to business and educational background of the firm’s principals.

The ADV will also state whether the advisory firm has custody of client assets, or whether it uses an independent third party to hold these assets. In our opinion, it is imperative for an investor to make sure that the firm with which they do business uses an independent
custodian, as this creates a system of checks of balances that ultimately protects the investor.

And finally, maybe the most revealing question—how does the adviser get paid? Those advisers compensated on a transparent, level-fee basis have much less incentive and ability to defraud than those who get paid a commission from each client transaction.

David Novak, CFP® is a Certified Financial Planner™ at Novak & Powell Financial Services in Pinellas County. Please note: he is not an attorney and this article should not be construed as one offering legal advice. For information about investment decisions and financial planning, email him at david@novakpowell.com.

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