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The Five-Minute Guide to Due Diligence

Last week's blog discussed Ponzi schemes, where we discussed ways to guard against fraudulent investments. This week, we're going to learn how to guard against fraudulent advisors. While there are no guarantees, a little homework on your part will go a long way towards protecting you.

There are two main organizations that monitor financial advisors, and provide free access to their information via their websites. There are some ancillary sites we'll cover as well. In the interest of full disclosure, we'll use me as the guinea pig to review the available information from these groups.

The most widely used agency is The Financial Industry Regulatory Authority (FINRA), which oversees about 4,400 financial firms with about 630,000 financial advisors. On their website (finra.org), there's a section (http://brokercheck.finra.org/Search/Search.aspx) where you can enter your advisor's or firm's name, and see lots of information. (I've attached a link with my report if you want to follow along.) You can see your advisor's:

   * Qualifications. This also shows if your advisor has ever been suspended with any regulator, obviously a warning sign.

   * Registration (Employment) History. This is important because you'll probably want an advisor who's been around for a while. Also, it's a danger sign to see lots of names on this section: if an advisor frequently switches firms, I'd worry about compliance problems, personality issues, and the like.

   * Disclosure events. This is a critical section, showing if your advisor has ever been sued, declared bankruptcy, received client complaints, etc. In my opinion, one red flag, maybe two, is not a deal-breaker. However, I would certainly carry out extra due diligence on an advisor with any issues in this section.

   * State registration information. Make sure your advisor is licensed by your state. You'd be surprised how often red flags pop up here.

   * Industry examinations passed or failed. Note that these only show FINRA exams. I have three financial planning designations and degrees, but none of them are listed here.

   * Any other business or professional affiliations or activities. This is important to check conflicts of interest. (For example, I met with someone yesterday whose advisor invested all the money into a chain of restaurants. Guess what the advisor's other affiliation was?)

The Securities and Exchange Commission (SEC) also provides information about investment advisers at http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx. I find these easier to read than FINRA's, but as you can see, they show less information, and there are many details missing. That said, there are cases where advisors are covered by the SEC, but not by FINRA, so check both sites.

One good ancillary site to check is Brightscope (http://www.brightscope.com). They pull information from both FINRA and the SEC, and also show information on your advisor's company. Again, there is a lot of missing information, but it's a quick, one-stop place to see basic information.

(By the way, if you're a participant in a 401(k), 403(b), or 457 plan, Brightscope has an excellent section which rates and reviews your plan. Go to http://www.brightscope.com/ratings, and find your employer's name. If your plan is expensive, or has poor investment options, you'll see it here. Pass the information to your human resources or benefits department, and hopefully they'll find better choices for you.)

Finally, if you want to check your insurance agent, check your state's insurance department (California's is at http://www.insurance.ca.gov/license-status/index.cfm). Here you'll see which insurance companies will do business with your agent (in general, the more choices the better), how long your agent has been in business, and more importantly, if there's been any legal problems along the way. You won't find much about me here, as I let my insurance licenses lapse fourteen years ago, so I could focus on financial planning and investment management.


Very few people check up on their financial advisors, which is a shame. It will only take you a few minutes to visit these sites, pull up your advisors, and check their information. I never understood why people will check the likes of Yelp before spending $50 at a restaurant, but not before spending hundreds or thousands with an advisor. Protect yourself and carry out your own due diligence. And as always, please respond with any questions or comments below.

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Comment   |  4 years, 10 months ago from Walnut Creek, CA