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“In 2009, FINRA took 993 disciplinary actions, barring 383 individuals, suspending 363 others and expelling 20 firms.  We levied fines against firms and individuals totaling nearly $50 million.  In addition, we ordered firms and individuals to return more than $8.2 million in restitution to investors.”  Source: Financial Industry Regulatory Authority (FINRA) annual report 2009.

It seems like every day brings a headline about another rogue broker, an investment firm shutting down, or a financial scam affecting thousands of investors.  The Financial Industry Regulatory Authority report of disciplinary actions for December 2010 was 44 pages long!

With such constant negative news, it brings up the common question of exactly what an investor should do to protect her in the very dangerous world of investments.  In a three-part series we will discuss how to investigate a financial advisor or broker before you hire one; how to understand the relationship between you and the financial advisor or broker; and finally what to do if something goes wrong.

Selecting and investigating your broker

For many people, hiring the right broker or financial advisor can make investing easier and more successful.  The vast majority of stockbrokers and brokerage firms are honest and reputable.  However, like any profession, there are those individuals and firms who are not.  A smart investor will investigate a brokerage firm or advisor before using its services.  While using a good broker does not guarantee that you will make a lot of money, it will, at least, help make your investment experience a happy one.  If you are about to entrust some of your funds to an individual or securities firm, it is worth your while to do a background check.  It may save you both money and future aggravation.

It is best to find a broker through recommendations.  Friends, relatives, financial advisors and co-workers can tell you their experiences with their own brokers.  The one who listens to his clients’ needs, reviews his accounts, and has a proven record of looking out for their clients is the one you want.

Here are some additional steps to take to screen a potential broker.

1. The Financial Industry Regulatory Authority (FINRA) is the main regulator for all securities firms doing business in the United States.  FINRA’s stated mission is to “protect America’s investors” by making sure the securities industry operates fairly and honestly.  Whether and how FINRA does that is a subject for another blog.  However, FINRA oversees nearly 4,580 brokerage firms, about 162,850 branch offices and approximately 630,695 registered securities representatives.  Its website contains much information of use for the public.  In particular, any potential broker should be looked up usingFINRA’s Broker Check.  Here you will find information about employment history, licenses held, and customer complaints.  While there may be many reasons for a customer complaint, consider asking your broker about it if a complaint shows up.  Was it an isolated incident, or is there a pattern of dissatisfied clients?  An occasional customer complaint may be inevitable; however, an advisor with a history of customer complaints probably should be avoided.  If your broker has a pattern of changing firms, this should be investigated as well.

2. The United States Securities and Exchange Commission (SEC) provides a useful website to check out an investment advisor.

3. You should also check with the securities regulator in your state. The North American Securities Administrators Association (NASAA)’s website provides links to all 50 states’ regulators.

4. Finally, consider performing a simple internet search of your potential broker’s name or checking with the Better Business Bureau (BBB). Many times these will turn up information useful in determining whether to entrust him with your money.

If you find red flags or warning signs discuss them with the potential broker before hiring him. A reputable broker will be happy to answer any questions that you have. You should feel comfortable talking with your broker.  If not, he may not be a good fit.  Remember, act like the advisor is going to be holding your life’s savings, because he may be doing just that! 

Practice Areas:  Financial Fraud