Investors can save themselves a lot of grief by doing their homework. Before agreeing to use an investment professional’s services, visit BrokerCheck to look for previous customer complaints, as well as criminal and regulatory disclosures. The Financial Industry Regulatory Authority (FINRA) maintains a public record of customer allegations, as well as investment-related convictions, investment-related civil judgements, and regulatory actions.
You should look up your broker or financial adviser on BrokerCheck even if you found your investment professional through a well-known financial services company. All kinds of firms hire brokers with records of misconduct. Another reason for vigilance: The Walls Street Journal has reported on individuals barred by FINRA continuing to pose as investment advisers.
Only around 7% to 9% of brokers have a disclosure on their record. Out of the brokers that have disclosures, about one-third of those are repeat offenders.
That said, a disclosure doesn’t necessarily mean that you can’t or shouldn’t work with particular broker. You might not care about a single customer dispute from 1998 that ended up being withdrawn — BrokerCheck is simply a tool designed to help investors get all the facts before handing over their portfolio.
Before we walk you through what to look for on BrokerCheck, let’s go over a couple of basic definitions.
Brokers vs. Investment Advisers
- Brokers are investment professionals who conduct securities transactions — only registered brokers are allowed to buy and sell securities. Brokers are required to make suitable recommendations that take into account their client’s financial situation, but they are not required to only work in their client’s best interests.
- Investment advisers: In addition to making securities transactions, advisers also evaluate their client’s investments for a fee. An adviser is considered a fiduciary, which means that they must act with their client’s best interests in mind.
What’s a Security? A security is a tradable financial asset. That asset could take the form of a stock, a bond, real estate, or a mutual fund. In order for something to legally be considered a security, it has to pass the “Howey Test.” The Howey Test determines if a purchase meets the definition of an investment contract — i.e., if the purchaser can reasonably expect a return on their investment.
Disclosure: A disclosure is an entry on a financial professional’s record. You can see a full list of information maintained by FINRA on BrokerCheck here.
Arbitration: FINRA members (i.e. brokers, firms, and investment advisers) agree to settle their disputes via a FINRA arbitration hearing. For an arbitration hearing, FINRA supplies a selection of neutral arbitrators and a virtual or physical location for the hearing. Parties agree that these panels’ decisions are final and binding.
Go to BrokerCheck.com and enter in your potential financial advisor or broker’s name. Even better: Look them up by their CRD (Central Registration Depository) number. With over 600,000 registered brokers, it’s essential to makes sure you’re looking at the correct John Smith.
You can also look up firms, like Merrill Lynch. They have CRD numbers as well.
Naturally, investors should know if financial advisers can manage their own money. BrokerCheck records include bankruptcies, tax liens, and investment-related civil judgements.
Regulatory actions can come from FINRA, the SEC, or a state. If a broker has been suspended or barred, that information will appear under a Regulatory Action.
This is where you’ll find record of any Acceptance, Waiver, and Consent (AWC) agreements. In an AWC, an investment professional can consent to FINRA’s findings without admitting to any wrongdoing. This section will include information about fines your broker or investment adviser had to pay, as well as the dates of their suspension.
Detailed BrokerCheck Report
If you want even more details (including a list of disclosed outside businesses), you can find a link to the “Detailed Report” in the upper righthand corner of an investor’s BrokerCheck page.
In a BrokerCheck profile, you’ll see the firm where your investment profile is registered, as well as any previous firms.
If your broker’s former employer terminated their employment, you’ll see a disclosure entitled “Employment Separation,” along with the allegations that led to their termination. You might also see that the investment professional was “permitted to resign,” which might mean that they had an attorney negotiate the terms of their employment separation.
If your broker has ever been charged with a felony, the BrokerCheck includes a record of the charges. This section may also include a Broker Comment, where the broker can make statements about the charge that they want investors to keep in mind.
Customer Complaints and Disputes
If you have a complaint about your broker or investment adviser, FINRA advises that you first inform the firm of your complaint. They may be able to address your concerns without getting FINRA involved. If that doesn’t work, you can visit FINRA’s site to file your complaint.
FINRA publishes statistics on the most common types of customer complaints, which you can see on their Dispute Resolution Statistics page.
Top 3 Examples Customer Complaints:
- Breach of Fiduciary Duty.
- Failure to Supervise. (This is actually directed at firms who don’t have written procedures in place to make sure their members handle clients’ money appropriately, or at firms who do have those procedures in place but failed to properly enforce them.)
Customer Complaint Resolutions
If they don’t enter into arbitration, customer disputes are either Settled, Withdrawn, or Denied.
- Denied: Denied means that the firm decided the client’s claim did not merit a settlement. It’s important to note that the client might still have good grounds for their dispute, but for whatever reason the matter didn’t move forward with a settlement, or some other form of dispute resolution. The denial comes from the firm, and not a neutral third party.
- Withdrawn: If a complaint is withdrawn, it means that, for whatever reason, a client decided not to pursue their initial dispute.
- Settled: In many instances, firms will simply settle with customers instead of entering into arbitration.
- Pending: If a dispute has not reached a conclusion, BrokerCheck will label the dispute as “Pending.”
Broker Comment Section:
For each disclosure, brokers can state details that they believe offer important context or qualifications. They might be as simple as, “I deny the client’s claims,” for a dispute, or, “The tax lien was the result of a contentious divorce.” Investors can decide for themselves how much stock to put in these statements.
What to Do if You’re Concerned
If you find that your broker or financial adviser has disclosures on their BrokerCheck record, you may want to scrutinize your investments.
But keep in mind that even if there isn’t something in BrokerCheck, there could still be cause for concern. FINRA’s BrokerCheck does have limitations, and records can be expunged. Also, regulatory actions and complaints don’t show up on FINRA instantaneously, so it’s important to check back every once in a while.
If you have have any questions or concerns about your investments, reach out for a free consultation with a securities attorney who can assess if you might be able to collect monetary damages. Call (877) 238-4175 or email firstname.lastname@example.org for your free case consultation with a securities attorney.