New rules for financial professionals make it more crucial for investors to conduct background checks and read disclosures for conflicts of interest. Here’s how to find the information you need.
First, determine what type of adviser you’re working with. This matters because different advisers are regulated differently.
The place to check on brokers is BrokerCheck. The database is maintained by the Financial Industry Regulatory Authority, the industry’s self-regulator. Search for an individual’s name and check the top, light blue section for registration information.
It is important to know if you’re working with a broker, because a broker doesn’t have to act as a fiduciary.
The Securities and Exchange Commission’s Investment Adviser Public Disclosure site has detailed reports for those who are registered as investment advisers.
Investment advisers do have to act as fiduciaries, though that doesn’t mean conflicts of interest don’t exist. More below on finding that information.
Dually Registered as Broker and Investment Adviser
If your representative is both a broker and an investment adviser, it will say so at the top of the person’s BrokerCheck page. It should also indicate this at the bottom of their IAPD page, under “broker dealer information.”
It is especially important to know if your investment adviser is dually registered as a broker, meaning he or she may not be acting as a fiduciary in every aspect of your relationship.
Regulatory disclosures can be long and dense, but here are some ways to make the task less daunting. It is important to look these up to check on any disclosed conflicts of interest.
First, to find disclosures for an investment adviser’s firm, search SEC’s Investment Adviser Public Disclosure site by firm. You will see two buttons. The first shows the latest Form ADV, which requires information about the investment adviser’s business, ownership, affiliations and any disciplinary events of the adviser or its employees.
The second part shows brochures with information including the types of advisory services offered, the adviser’s fee schedule and conflicts of interest.
Now that you have the documents, here are a few suggested search terms.
Firms are supposed to spell out their conflicts of interest. One example, from a national firm registered as both a brokerage and an investment-advisory firm that discloses third-party compensation: “The receipt of such additional compensation presents a conflict of interest for us as it creates an incentive for our Financial Advisors to recommend investment products based on the compensation received rather than solely based on your investment needs.”
“Fee-Only” and “Fee-Based”
“Fee-only” signals the adviser is only paid fees directly from the client. Consumer advocates say fee-only advisers tend to have fewer conflicts of interest. That isn’t the same as “fee-based,” which could mean the representative also earns commissions or compensation from third parties.
Firms are supposed to disclose incentives that may affect adviser behavior. “These benefits can create an incentive for a Financial Advisor to recommend certain transactions, products, and services over others in order to obtain the benefits,” one firm says in its disclosure.
Some brokerage and advisory firms receive revenue-sharing payments from fund managers in exchange from marketing and selling the funds. While revenue-sharing payments may not directly reduce a client’s investment, they may motivate an adviser to recommend certain products over others.
Write to Lisa Beilfuss at email@example.com