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.
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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.)
Shop around
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.