There is a loss of confidence currently in the markets, and in financial institutions and experts, among many consumers. Ken Himmler of Lakewood Ranch, Fla.-based Integrated Asset Management suggests advisors provide transparency to clients and present them with a list of five questions they can ask so they know you’re the right person to handle their assets.
- Does the advisor have a clean record? Regulatory bodies such as the Financial Industry Regulatory Authority and the Securities and Exchange Commission provide online resources for investors to research if any prior complaints have been filed against a financial professional. Third party resources, such as the National Ethics Bureau, allow for consumers to gather the comprehensive background information of a financial professional, including FINRA and SEC, as well as the Department of Insurance and State Securities Administrators, along with the criminal, civil and professional background of the selected advisor.
- Does your financial representative have custody of your financial accounts? Firms that have full custody of your financial accounts are technically in the position to liquidate those accounts. Advisors with custody do not have strict regulatory channels to go through when making trades on your behalf. Comparatively, advisors who trade through recognized brokerage firms such as Scottrade, TD Ameritrade, Schwab or Fidelity do not have any direct access to the money in your investments, meaning the funds are not housed at their firm nor do they become the assets of the brokerage firm.
- Where is the advisor recommending you put your money? Be involved in your advisor’s investment strategy and don’t be afraid to check their work and ask questions. If they recommend a specific insurance company, stock or other securities product or even a bank, check those recommendations first before agreeing. What is the rating of the insurance company? What is the history of the securities product and is it financially sound, or in financial trouble? Is the bank large enough to sustain a volatile economy, or do you have doubts?
- Does your financial representative invest your money in private funds? Hedge funds, private equity, fund of funds and similar are private investment vehicles and are only lightly regulated. Often, the person who sells and manages the fund is also the controller of invested monies and is the one responsible for verifying the fund amount to any regulatory party. There is not a system of checks and balances with this type of investing, and can leave the investor vulnerable to the fund manager’s desired course of action, whatever that may include. Firms that are regulated, for example, have strict rules and policies in place to ensure the chances of fraud or human error are mitigated. Some examples would be requiring signature cards for account withdrawals or transfers, Internet protocol for securities transactions, and diversification of power, not allowing for one single person to have total power over all investment transactions.
- Is your financial representative held by fiduciary rules or rules of suitability? Stockbrokers, otherwise referred to as registered representatives, are typically only held to the rules of suitability, rather than fiduciary responsibility. Suitability rules mean if the broker or manager loses your entire account value while under his/her management, but can establish that you were an accredited investor or could afford the loss; their liability for the loss would be limited. Investment advisors, financial planners, and similar, are subject to higher regulatory guidelines, fiduciary rules, meaning they are liable for the overall financial strategy recommended to a client and could be held liable if they were to lose a significant portion of one’s investment portfolio.