Can your broker or adviser be trusted? There is no way to be 100 percent certain, but far too many investors don’t even take a few simple steps to protect themselves. Start by asking questions. Here are four key ones, and tips for finding the answers.
WHO’S PAYING YOU?
If a broker or adviser is pushing a specific investment, maybe it’s because they’re getting paid to do so. Many mutual funds charge one-time “sales loads” or annual “12b-1” fees that come out of your pocket and go into theirs. Cheaper, equally good funds may be available, but they may not tell you.
Make sure to also ask about commissions, markups or hidden fees they may get for selling stocks, bonds and insurance products.
ARE YOU A FIDUCIARY?
You’re in safer hands if the broker or adviser is held to a fiduciary standard. That requires them to put your interest ahead of their own, so they must tell you about cheaper alternatives. They also must monitor your investment.
That’s not the case for many brokers now. They are required only to limit recommendations to products that are “suitable” based on your financial situation, age and appetite for risk, which critics say gives too much room for foul play.
WHAT DO THOSE LETTERS MEAN?
The number of professional designations and acronyms has jumped in recent years, but don’t be fooled. Regulators say some reflect higher standards than others. If you’re confused, it is best to insist that your adviser has a well-known one, like certified financial planner, which has strict requirements and carries the weight of the fiduciary standard.
WHAT’S ON YOUR RAP SHEET?
Client complaints and regulatory action against brokers can be found at a database maintained at industry regulator FINRA. Type in the name of the broker at http://brokercheck.finra.org/Search/Search. But the site isn’t foolproof. Much of the information depends on brokers updating information themselves, and older complaints are purged regularly.
You may also want to check out your broker or adviser’s so-called ADV form filed with the SEC at adviserinfo.sec.gov. It may help to Google the broker, too.