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5 Things to Check When Hiring a Financial Advisor

July 14, 1996|CHARLES A. JAFFE | Charles A. Jaffe is personal finance columnist at The Boston Globe

Eighteenth century English author Samuel Johnson once noted that there are two types of knowledge. The first is actually knowing something, and the second is knowing where to find it.

That, in a nutshell, sums up the situation for most people trying to manage their own money. Either you know enough to feel comfortable investing, know where to get the information to make informed decisions, or know that you need help.

But if you fall into that last group and all you know is that you need to hire an advisor, your knowledge is still short by at least one piece of crucial information. You must know how to do a background check on a broker or financial planner.

Recently, the Investors Protection Trust--a group that promotes investor education and fights securities fraud--issued a survey on financial literacy which showed, again, the alarming lack of money management knowledge of the average American.

No matter how unsettling, the findings on America's financial knowledge level weren't particularly new and enlightening.

But the group also looked at the number of investors who investigated the disciplinary background of their broker or financial planner and found that nearly 90% of the people paying for advice never did a background check. Experts believe that they doubt 10% even do much checking and that really virtually no one checks out the experts before signing on.

That's the financial equivalent of riding a high-speed motorcycle without a helmet, walking a tightrope without a safety net or skydiving without a back-up chute. You might be fine, but you could end up hurt because of your carelessness.

"One of the things that amazes me is that people give their money to someone they have never done business with before, based on business cards and appearances, and those are really dangerous waters to be swimming in," said Neal E. Sullivan, executive director of the North American Securities Administrators Assn. "They are just playing with fire."

It's easy to find out if an advisor is now or has ever been in trouble. If you have a financial counselor--or plan to get one in the future--here is what you will need to do:

1. Line up the advisors you are considering.

Round up the names of a few planners or brokers whose services meet your needs. You may develop this short list from referrals or off of the bulletin board at the health club, but the idea in picking an advisor is to interview several.

Call each advisor to be sure they are taking new clients and are willing to meet with you. Be sure that you would fit comfortably into their clientele, in terms of your assets and advisory needs, but hold off on arranging an interview until you are satisfied with their personal history.

2. If you are hiring a financial planner, ask for a copy of their Form ADV.

This is a background sheet that gives some basics on how a planner is compensated, where they got their schooling and more. But here's the tricky part. Most advisors only hand out Part 2 of the form, and that's not where the disciplinary actions would show up. Those are on Part 1. Ask for it.

The advisor knows you can get this from other agencies, and should be willing to give it to you upon request; any planner who won't give you their ADV is not worth dealing with.

3. For both brokers and financial planners, your next call is to the state securities administrator.

The primary role of the state securities administrator is to protect the small investor. They do this by registering financial planners (all but four states now require planners to register) and tracking the actions taken against brokers, monitoring both individuals and entire firms.

Call the securities office in a state where the advisor is registered to do business. To get the number of administrators in your state, call the North American Securities Administrators Assn. at (202) 737-0900.

You can also call the National Assn. of Securities Dealers public disclosure information center at (800) 289-9999, although state agencies typically offer more detailed reports.

Typically, the state agencies and the NASD will examine a broker's Central Registration Depository or CRD to see if a broker has some dirt in their past. They will send you the CRD file, although some states do require that you make the request in writing or pay a nominal fee.

Many financial planners also function as brokers and have a CRD, but those who do not will be a bit harder to get details on. Still, the states generally can provide the form ADV and tell you if any actions have been filed against a planner.

4. Make sure professional designations are real.

Those letters that some financial counselors have after their names look impressive, but may not be. While the majority of advisors respect the marks they have earned, others fall behind in the continuing education process and lose their designations.

That doesn't stop them from using the letters or force them to change their letterhead, however.

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