As managing money gets more and more complicated, more people are turning to professionals for advice. But multiple databases, clearinghouses, and certifications for financial advisors can make it difficult to see your financial advisor’s history, according to new research published in the Stanford Law Review.
The researchers found that advisors with misconduct on their records can sometimes hide their misdeeds by operating under a different regulator. For example, someone barred from selling stocks by the Financial Industry Regulatory Authority can still sell derivatives, which are regulated by the National Futures Association. In fact, the study found that thousands of former FINRA brokers with misconduct on their records continued to provide professional financial advice after de-registering with FINRA.
Honigsberg and her co-authors built a database to identify more than 1.2 million financial advisors who were registered as a broker with FINRA at any point from 2010 to 2020. During that time, they found 395,887 of those advisors stopped being registered on BrokerCheck, FINRA’s tool for tracking financial brokers, advisors, and firms. More than 130,000 of them — about 34% — continued to be registered as financial advisors under a different regulator, most commonly the Securities Exchange Commission or at the state level as insurance advisors.
Of that group of 130,000, 10.71% had some history of misconduct. Examples of misconduct included paying to settle customer disputes, being terminated after allegations of improper behavior, being held liable in civil litigation, or receiving criminal or regulatory sanctions.
“The big issue here is that we have individuals who are performing very similar functions but are regulated under very different regimes, and this creates an opportunity for regulatory arbitrage,” says Colleen Honigsberg, a professor of law at Stanford Law School and one of the authors of the study.
How to vet a financial advisor
The easiest place to start vetting a financial advisor is FINRA’s BrokerCheck tool, which can tell you whether a person or firm is actually registered to sell securities and offer investment advice. The tool will also show you a broker’s employment history, including whether they’ve been subject to regulatory actions or complaints. Unfortunately, it can be more difficult to assess the background of an insurance agent.
“You’re going to have to go through the state,” Honigsberg says. The National Association of Insurance Commissioners, which sets standards for state insurance regulators, “encourages consumers to contact their state’s department of insurance if they have concerns about whether an agent is licensed.”
The Texas Department of Insurance, for example, has a help line (800-252-3439) for consumers to find out whether a company or agent is licensed within the state, whether any complaints have been filed against them, and whether the department has taken disciplinary action against them.
Another option is to use in-house agents at companies you trust that thoroughly vet their employees. (Disclosure: Policygenius is an insurance broker that employs insurance agents. All Policygenius agents undergo thorough background checks, and licensed agents are vetted with the state.)
James Lee, a certified financial planner and president of Lee Investment Management, says you should shop around if you’re looking for professional financial advice, just like you’d get multiple quotes if you were hiring a plumber or a moving company. If you’re looking for a financial advisor, he recommends talking to at least three to make sure they’re a good fit.
“You are looking for someone you trust, and [who]’s a good-enough fit that you’ll be able to rely on the advisor’s advice for the rest of your life,” Lee says.
Your conversations with a prospective advisor should determine whether your communication styles align, and whether they can provide the financial services you need. They can also help you identify red flags: are they using high-pressure sales tactics? Are they selling financial products at prices much lower than you’ve seen elsewhere?
If you’re buying insurance, make sure the person or firm is authorized to sell policies for the insurance company — often referred to as “appointed with the company,” says Ben Gonzalez, a spokesman for the Texas Department of Insurance. Keep receipts for your premiums; payments should go to the insurance company, not an individual. And when buying a new insurance policy, match up the quote you received with the declarations page of the new policy. If you’re unsure about something your agent says, double-check it with the insurance company.
“A legitimate agent is not going to have a problem with you confirming what they told you, or the terms of your policy, by calling the insurance company directly,” Gonzalez says.
Seek out credentials
Lee, who is president of the Financial Planning Association, says it’s a good idea to seek out someone who’s gotten additional credentials, like a certified financial planner. CFPs must meet experience, education, and ethical requirements to keep their certifications, including committing to a fiduciary standard, which means they must put their clients’ financial interests above their own.
“That’s a very critical question to ask as someone who’s seeking advice: If the person they’re considering has committed to that fiduciary standard of care for their clients,” Lee says.
Though a 2019 Wall Street Journal analysis found the CFP board’s LetsMakeAPlan.org website failed to show if advisors faced customer complaints or regulatory problems, the board says it has since implemented improvements to its enforcement program, including reviews of regulatory databases like BrokerCheck and Investment Advisor Public Disclosure. It also has its own database of state regulatory actions covering insurance and securities licensing organizations.
Support a national database of financial advisors
If this all sounds like a lot of homework, it is — and for many people, the idea of hiring a financial advisor is to outsource homework (and get professional, experienced advice about their money). That’s why Honigsberg and her co-authors call for the creation of a national, searchable database of everyone providing financial advice.
“It seems like a pretty basic requirement to me,” Honigsberg says.
And while bodies like the CFP Board can certify financial advisors who meet certain requirements, Lee says there should be federal standards for financial planners.
“We believe the legal recognition of the title is so important in order to ensure consumers are able to identify those professionals who have the qualifications to provide competent, ethical financial planning services,” Lee says.
Until that happens, the best thing you can do is carefully vet anyone offering financial products or advice, and shop around until you find the advisor — or company — that makes you feel comfortable.
Image: Luis Alvarez / Getty