Why You Need to Check Your Financial Advisor’s Background Records
Some tips for high-level advisor vetting.
Last Friday, I was interviewed by The Wall Street Journal about how to vet a financial advisor. I wound up getting deep into the details of my process. By the end of it, I realized something pretty basic that gets overlooked all the time.
Most people never look at advisors’ background records.
At the risk of being emphatic: Please read the records. This may sound like the “don’t forget to floss every night” part. But if you skip it, and you’re serious about working with a financial advisor, you’re missing an important step. We place those SEC records right on each advisor’s profile on Wealthramp to make it easier to access. I’ll share some tips for high-level advisor vetting.
First, start by learning something about the individual advisor’s background.
1) A BrokerCheck for the Individual
Use FINRA’s BrokerCheck to look up the person you’re talking to. Just type in the individual advisor’s name.
What you’re looking for:
Current registration: Is he/she a broker, a registered investment advisor, or both?
Employment history: Does it make sense, or is it a revolving door?
Disclosures: customer complaints, settlements, regulatory actions. This is where you’d spot red flags.
Give it to me in plain English: Who is FINRA and why do I care?
FINRA oversees brokers—the people who work at brokerage firms recommending investments like stocks, mutual funds, private investments and annuities.
Most people don’t realize that FINRA is a self-regulatory organization. It’s not the government. It’s the financial services industry overseeing itself. Let that sink in. It’s no different than high school students monitoring other students’ tests, or athletes refereeing their own games. There are rules, and they should be enforced. But it’s the same group policing itself.
Why fiduciary standard matters
A fiduciary is legally required to act in your best interest at all times. Brokerage firms are not willing to be held legally accountable when making recommendations or selling their products. They choose a lower standard of care.
That’s because brokers work under a commission-based sales model, not advice. Oversight comes from within that same structure. That doesn’t automatically make it bad. It just means you need to understand the incentives you’re stepping into. I know this because I worked under this model myself at a major brokerage firm decades ago.
After you’ve looked at the FINRA records, your next step for at-a-glance vetting is to go to the U.S. Securities and Exchange Commission’s site and pull the firm’s Form ADV.
2) Form ADV for the Advisory Firm
Every registered investment advisory firm has to file this document and update it every year. It’s public. It’s free. And almost nobody reads it. Shortcut: the narrative is Part 2.
Again, you’ll see it right below every advisor’s profile on Wealthramp. Here’s how to use it without getting lost:
Part 1: Facts about assets under management, number of clients, ownership, basic disciplinary history
Part 2A (the brochure): The real story about services, fees, investment approach, conflicts of interest, risks
Part 2B (supplement):The background, experience, and any disclosures for the individuals
What to zero in on
You don’t need to read every word. Here’s what matters:
How they get paid: Fee-only? Commissions? Both? If you can’t explain it in one sentence, keep going.
Conflicts of interest: Do they earn more if you buy certain products? It will be spelled out.
Minimums and fee structure
Disciplinary history: If it’s there, read it carefully.
Services offered: Are they only managing money, or offering comprehensive planning?
Despite all of this being free and public, most people skip this step. One national FINRA survey found that only 14.2% of investors checked an advisor’s background over a five-year period. Separate research shows that about 7% of advisors have some form of disciplinary history, with much higher numbers of customer disputes at some of the largest firms.
The fact that only 14.2% of people look at background records surprised me. That tells me most people simply don’t realize these records are there, or how much they can reveal.
The resources are free. So, yes—read BrokerCheck. Read the ADV.
After these two important vetting steps, I conduct personal interviews and ask a whole different set of detailed questions. Background records won’t tell you everything, but it’s a strong starting point.