The SEC issues bills of investor protection rules. How to find a good counselor

Finding a broker or financial advisor you can trust can sometimes seem like a daunting task.

This is especially true when investors see sensational stories of brokers running from the police in an underwater escape or faking their death in a plane crash. Then there are the high-profile fraudsters like Bernie Madoff, who masterminded the biggest investment scam in the country’s history – a Ponzi scheme that cost tens of thousands of investors up to $65 billion.

And there are, of course, less sensational but still remarkable events. The Securities and Exchange Commission accused a broker – Western International Securities Inc. — and five of its brokers on Thursday of violating a new rule aimed at increasing investment advice protections for consumers.

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Brokers reportedly sold more than $13 million worth of junk, unrated bonds to retirees and others, despite the bonds being unsuitable for these investors due to their illiquidity and speculation, according to the SEC filing. The broker did not respond to a request for comment.

It’s the first time the SEC has filed a lawsuit related to the Best Interests Regulation, which the federal agency issued in 2019 and companies had to comply by June 2020. Overall, the rule generally requires brokers and companies to place interests of a customer ahead. your financial or other interests when making an investment recommendation. They should share some of the logic behind a recommendation and disclose conflicts of interest.

There were 690,000 registered financial brokers and advisors in 2021, according to the Financial Sector Regulatory Authority, or FINRA. Here are some tips for consumers to find one they can trust.

Pay attention to red flags in regulatory databases, online surveys

There are some surefire warning signs that a consultant you are considering might not be a good choice.

Financial regulators have online databases that consumers can consult for basic information about specific individuals and companies. The SEC has one, the Investment Adviser Public Disclosure website, for financial advisors. FINRA’s resource, BrokerCheck, lists brokers. (A person or company can appear in both.)

First, make sure the person appears on any of the systems and is licensed or registered with a company.

That means they met a minimum level of credentials and experience to work in the industry, according to Andrew Stoltmann, a Chicago attorney who represents consumers in fraud cases.

“If they don’t, that’s the red flag,” Stoltmann previously told CNBC. “If not, it could be some guy calling from his mother’s basement.”

Potential customers should also Google the name of the advisor or broker to see if there are news articles about past indiscretions or lawsuits. If yes, it’s another bad sign. Regulatory databases will also list any disclosures, claims, arbitrations or settlements involving the individual.

Experts recommend checking for nefarious financial behavior such as abusive sales practices, inappropriate recommendations, and excessive or unauthorized trading.

Review account statements for other red flags

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However, just because these warning signs aren’t found initially doesn’t mean consumers should let their guard down. There are other signs to watch out for after deciding to entrust your money to an advisor.

One of the lessons of Madoff’s multibillion-dollar fraud was ensuring that his money was held in a third-party custodian like Fidelity or Charles Schwab, Stoltmann said.

That makes it much more difficult for a consultant to steal money or take advantage of a client, since assets aren’t held in-house and clients aren’t writing checks to the consulting firm, he said.

Think of it like a firewall like two-factor authentication — the custodian has certain procedures for withdrawing money, which usually involve contacting the customer, Stoltmann said.

Customers can check their regular account statements for this information.

Also, losing money is not necessarily a red flag, especially if it occurs in a bear market.

But it can be a bad sign if an investor’s portfolio is well below the usual stock and bond benchmarks, according to George Friedman, an adjunct professor of law at Fordham University and a former FINRA employee.

“At some point you start asking questions,” he told CNBC.

Trading hyperactivity, as described in an investor statement, is another telltale sign. This account turnover generates fees and commissions for consultants, but financially harms the client.

Proprietary investments — for example, owning a mutual fund managed by your brokerage — are not necessarily a sign of fraud, but they can be a sign that an advisor or company is making money at your expense, Friedman said.

“I reviewed the account statements every month,” he said. “If you see something funny or unusual, that’s a flag.”

Of course, investor statements can be manipulated to hide this information.

Ask questions about investment recommendations

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Unsatisfactory or late responses to customer inquiries should lead customers to escalate their case to the company’s compliance department.

Being asked to communicate outside of a consulting firm’s official channels, such as the company’s email, is also a big red flag.

And, most importantly, understand your investments; just put your money with reputable asset managers and funds, experts say. If you can’t understand, it’s a bad sign as it’s an investment that sounds too good to be true.

Micah Hauptman, director of investor protection at the Consumer Federation of America, suggests asking a broker or advisor to verify in writing what they are recommending and why they have not recommended a simpler, less expensive option.

“If they can’t give a simple, specific, clear and concise answer to ‘why is this as opposed to anything else on the market, based on cost and product quality?’ that could raise some red flags,” Hauptman said. .

Look for a fiduciary advisor, fee only

Brokers generally remain a lower cost option over advisors for consumers who trade stocks and mutual funds infrequently and hold them for a long time.

Consumers who want ongoing, holistic advice and to minimize exposure to conflicts of interest should seek a financial advisor for a fee, according to consumer advocates.

They can look for these advisors on networks like the National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network, and Alliance of Comprehensive Planners.

These consultants must have a core competency such as the Certified Financial Planner, or CFP, designation for financial planners, and be paid only fixed fees for their hourly service, monthly subscriptions, or fees based on the assets they manage for clients, Ron Rhoades, he a CFP and director of the personal financial planning program at Western Kentucky University, told CNBC.

“This is the easiest way for a consumer to find someone who is definitely on their side,” Rhoades said.

Consumers should interview at least three different consultants after conducting research to ensure they get the right fit, he said.

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