Deciding to hire someone to help manage your money requires a lot of trust, and not all people in the industry deserve yours.
About 7% of financial advisers have been disciplined for misconduct or fraud, though that rate is much higher at some firms, according to a working paper from the University of Chicago. Of those who have been disciplined, 38% are repeat offenders.
The Financial Industry Regulatory Authority (FINRA) requires people registered to sell securities or give investment advice to “disclose customer complaints and arbitrations, regulatory actions, employment terminations, bankruptcy filings and criminal or judicial proceedings.”
There are 23 categories of disclosures, and while disclosures don’t necessarily indicate misconduct, they’re good to know about if you’re considering giving that person significant control over your finances. Of those 23, the University of Chicago researchers focused on six that indicate misconduct, including customer disputes that end in favor of the customer, regulatory action and employment separation after an allegation.
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The paper, “The Market for Financial Adviser Misconduct,” evaluated data from BrokerCheck, a public tool managed by FINRA, which allows people to see disclosure history for an individual adviser or a firm.
You can also see how long the person has been in the industry and previous firms they have been registered with. It’s a straightforward search tool, allowing you to look up advisers by name, Central Registration Depository (CRD) number, firm or location. Say you’re looking for an adviser within 5 miles of your ZIP code: You’ll likely get a long list people you could potentially work with, but going through the records could help you identify someone you may not want to hire.
Research is crucial whenever you’re making a significant financial decision, whether that’s applying for a credit card, saving for retirement or hiring an investment adviser. To minimize the chances you run into problems in the future, take your time getting as much information as possible so you feel confident whenever you make your decision.