Preamble: I wrote this a long time ago for /r/PF but got no response to it. Every now and then someone here will find themselves suddenly with a large windfall and no idea how to handle it. Hopefully this is of help to at least a few of you.
"There's a sucker born every minute" - probably someone wanting to get rich quick. And while a sucker continues to be born every single minute, there will be someone posing as an "adviser" waiting to slowly drain you of your cash. After yet another front page post of someone being sweet-talked into ridiculously loaded funds and unnecessary insurance products, I've decided to create a post to let people know how to research an adviser.
If you are currently with an adviser and concerned that something is amiss, or you are currently in talks with an adviser and unsure you should let them handle your money you will need these two websites:
FINRA (Financial Industry Regulatory Authority) is not a government regulatory agency, but rather a non-profit self-regulatory organization dedicated to promoting the safety of investors. How they do this is through requiring anyone who wants to give investment advice or sell securities to pass exams that demonstrate knowledge. Two of the more prominent of these exams are the Series 7 and the Series 65. The Series 7 exam allows one to trade securities and the Series 65 allows one act as an investment adviser and give advice to clients.
Now, why this is important in the RIA space is because it determines how your adviser is allowed to act.
The SEC is the government body in charge regulating the securities industry, and more importantly, those who work in the industry. From their website, this is what the IAPD does:
The Investment Adviser Public Disclosure (IAPD) database provides instant access to registration documents filed by more than 25,000 SEC- or state-registered investment advisers. IAPD provides access to Form ADV filings made by investment adviser firms that register electronically using the Investment Adviser Registration Depository (IARD). IAPD also provides access to registration information filed with the states by investment adviser representatives (certain individuals that are employed by an investment adviser).
Which means that legally, anyone holding themselves in the public as a registered investment adviser must file a public disclosure. There are exemptions to when someone must register as a registered investment adviser, however, those exemptions are very specific.
The most important thing of note on the IAPD is the firm form ADV. The ADV is split into two parts.
Part 1A of the ADV lists the following:
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General business contact information and principal office (certain firms may have grown and can afford multiple offices) (Item 1)
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How the firm classifies itself (large advisory firm, small advisory firm, pension consultant, advisory with main office outside of the US (Item 2)
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Individual states the firm is authorized to trade or sell securities in (Item 2)
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How many employees the firm has and how many are allowed to give investment advice, licensed to sell insurance, or registered with a state to sell securities (Item 5)
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How the advisers are compensated (Item 5)
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What type of services the firm provides (Item 5)
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If the firm is involved with other business activities and if the firm sells products (If yes, go to Section 6.3B of Schedule D) (Item 6)
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If the firm is has any potential professional/financial industry conflicts of interest (Item 7)
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If the firm has any client conflict of interest (Item 8)
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If the firm or any affiliate has been convicted of a felony, misdemeanor, been in trouble with the SEC or Commodity Futures Trading Commission, any other federal or state regulatory agency, any self-regulatory organization (such as FINRA, or even the New York Stock Exchange), or if the firm/any affiliate has been in trouble for investment-related activity. (Item 11)
Part 2 of the ADV is the "Firm Brochure". Every single firm is required to hand this out and I highly recommend you ask your advisor for theirs. The brochure will list how the firm charges for compensation, the types of clients they do business with, and the code of ethics of the firm.
Schedule A lists the owners of the firm Schedule B lists any indirect owners Schedule D (yes, D, not C) is the general "extra info" schedule. Usually, if an adviser has checked some box "yes" where you think it should have been checked "no" there will probably be an explanation in Schedule D. For example, if you see that a firm checks yes in the section asking if they "sell products or provide other services", Schedule D may state that the firm offers a fee for tax preparation.
Now, with all of that said, let's go into IAPD and BrokerCheck to search for a firm in my hometown.
On the IAPD search page you can search by individual or by firm. However, if you have nothing in mind, you can just do a general search in an area code, like I am doing. Once you hit search, you'll be presented with a list of every firm in that radius who registers as an investment adviser or brokerage with the SEC or the state it resides in. At the bottom you can see there were 53 hits for a 5 miles radius in the 23320 area code. I'm going to focus on Lincoln Financial Advisors Corporation. This firm offers brokerage services as well as investment advice. Both of the blue links are clickable and in fact, clicking on the brokerage link will take you to FINRA's BrokerCheck website, since that is the organization in charge of regulating brokers. For now, we'll click on Investment Adviser Firm. That will bring you here. The first thing that should stand out is if this firm is registered with the SEC or not. If it is not registered with the SEC, then that isn't immediately a cause for concern. If a firm manages less that $100 million and is housed in a state that doesn't require registration, then the firm is not required to register with the SEC.
Click on the blue SEC and then you'll be into the form ADV. Scroll down a bit and on the left you'll see all the items, brochure, and schedule links. From here you can explore anything.
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From Item 1 I can see that the principle office is located in Fort Wayne, Indiana, and not Chesapeake, Virginia.
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In Item 5 I see that the company employs 1480 people, so it looks like I'm dealing with a large company, and not a small local shop. I can also see that the firm charges compensation by percentage of assets under management, hourly charges, fixed fees, and commissions. They are involved with numerous activities, so it's possible they do tax filing services or sell insurance. Right below I can see that it provides educational seminars for a fee.
- In Item 6 I can see that it is also involved in the broker-dealer business and insurance business
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In item 8 I can see that the firm checked yes to
do you or any other related person recommend purchase or sale of securities to advisory clients for which you or any related person has any other sales interest (other than the receipt of sales commissions as a broker or registered representative of a broker-dealer)?
and
do you or any other related person recommend purchase of securities to advisory clients for which you or any related person serves as underwriter, general or managing partner, or purchaser representative?
Which means that they recommend securities that someone related to their practice has a vested interest in and that they recommend securities that have their own vested interest in.
Here's a real fun page from their Item 11.
Let's go into BrokerCheck to see how or what their regulatory offenses. BrokerCheck has a similar working search feature. So I'm going to go search 23320 for the firm. After searching the firm and scrolling down a little, you'll see this. This shows you what the firm again registers as, what those terms mean, the main office, and if it has disclosures (which we already knew about from the IAPD). We can click on "detailed report" and have a report created for us. This report will tell us
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the extent of the firm's disclosures
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if it is currently suspended with any regulators
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who it registers under
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The details of any allegation the firm has been through for example
The details of everything I just went through can also be done with an individual!
From all of this, I personally wouldn't invest with Lincoln Financial Advisors, mainly because I enjoy the feel of a smaller office and a company that was started in the area I live. Also, I don't live in my hometown and I work in the industry.
Hopefully this was of some help to you. One day I'll go back and make everything a little easier to read and more concise.
Submitted March 28, 2017 at 01:38PM by FromBayToBurg http://ift.tt/2odyjF5
