You’ve probably read the headlines about Bernie Madoff-style Ponzi schemes; about people who call themselves financial advisers but are really product-peddling salespeople, neither qualified nor authorized to provide financial advice; about individuals who claim they are working in your best financial interests when they’re really putting their own financial gain first.
As positive a force as the right financial professional can be, negligence and bad actors are an unfortunate reality in the financial-services world. It is therefore critical that consumers educate themselves to make sure that the professional in whom they place their trust is qualified, plays by the rules, and always puts the best interests of his clients above his own.
A little knowledge about how financial professionals are regulated can go a long way in helping to identify and avoid bad actors. Here are four areas where that knowledge can be particularly valuable:
Know the meaning of those capital letters. When you see upper-case letters after an adviser’s name, that typically refers to a specific designation or qualification that indicates a certain level of training in a specific financial-services discipline.
For example, to earn a CFP (Certified Financial Planner) designation, an adviser must complete a series of courses, then pass an exam. He or she also must earn continuing education credits to maintain a CFP designation.
Verifying that someone has earned the right to claim such a designation is a matter of identifying the organization that provides it, then using its web-based verification tool to find information about the adviser in question. With the CFP designation, it is accomplished through the College of Financial Planning’s comprehensive verification database, at www.letsmakeaplan.org/choose-a-cfp-professional/verify-a-cfp-professional.
Know who regulates whom. Financial professionals generally are regulated by both federal and state agencies. At the federal level, investment advisers – professionals who provide advice about investing in securities, including stocks and mutual funds – must be registered with the U.S. Securities and Exchange Commission (SEC) to ensure that they adhere to the standards and rules enforced by that agency, in addition to the standards and rules of the securities regulatory agency in their state.
Another organization, FINRA, at www.finra.org/#/, regulates stock brokers and brokerage firms at the federal level. Advisers who sell insurance products are regulated by state insurance agencies.
Know where their interests lie. Perhaps the most important thing for consumers to know about a financial professional is the standard to which the person is held in his or her work with clients. Certain financial professionals are obligated, by law and/or under the terms of their professional designation, to always put the best interests of their clients above their own. This is called a fiduciary standard. Among the licenses, designations and certifications that come with a fiduciary standard are a CFP, a Registered Investment Adviser (RIA) and a Chartered Financial Analyst (CFA).
A less stringent set of rules, known as the suitability standard, applies to most stockbrokers and insurance agents. This standard requires them to recommend products that are “suitable” for the client, which means the recommended security or product must fit the client’s investing objectives, needs and circumstances.
Unlike with fiduciaries, the allegiances of advisers who operate under a suitability standard ultimately lie first with their firm and/or the company whose products they’re recommending and selling. While they are required to recommend “suitable” products to their client, their recommendation might not be the most suitable, considering factors such as fees, commissions, etc. Therein lies a gray area: Just because a product is suitable doesn’t mean it’s the best fit for the consumer.
Know how and where to verify an adviser’s background. You want to be sure an adviser comes as advertised – that professional credentials are authentic and the professional record is spotless. To learn if an adviser has had any complaints, judgments or legal actions against him or her, check out the Securities and Exchange Commission site, www.sec.gov. Additionally, you can check information on an adviser’s business practices, fees, conflicts of interest and disciplinary information at www.adviserinfo.sec.gov/IAPD/Default.aspx. To confirm if a broker is properly licensed in your state and to see if he or she has any complaints and/or disciplinary actions, try FINRA’s BrokerCheck tool, at brokercheck.finra.org.
JASON E. SIPERSTEIN, CFA, CFP, is the president-elect of the Financial Planning Association of Rhode Island and president of Eliot Rose Wealth Management. He can be reached at email@example.com.