SEC issues investor protection rule charges. How to find a good advisor

Finding a broker or financial advisor you can trust may, at times, seem a daunting task.

That’s especially true when investors see sensational stories of brokers fleeing the police in an underwater getaway or faking their death in an airplane crash. Then there are the high-profile fraudsters such as Bernie Madoff, who masterminded the nation’s biggest investment fraud in history — a Ponzi scheme that cost tens of thousands of investors up to $65 billion.

And there are, of course, less sensational but still notable events. The Securities and Exchange Commission charged a brokerage — Western International Securities Inc. — and five of its brokers on Thursday with violating a new rule that aims to raise investment-advice protections for consumers.  

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The brokers allegedly sold more than $13 million of high-risk, unrated bonds to retirees and others, despite the bonds being inappropriate for these investors due to their illiquidity and speculation, according to the SEC release. The brokerage didn’t respond to a request for comment.

It’s the first time the SEC has filed a lawsuit in connection with Regulation Best Interest, which the federal agency issued in 2019 and firms had to comply with by June 2020. Overall, the rule generally requires brokers and firms to put a client’s interests ahead of their financial or other interests when making an investment recommendation. They must share some of the logic behind a recommendation and disclose conflicts of interest.

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

Heed red flags in regulator databases, online searches

This means they have met a minimum level of credentials and background to work in the industry, according to Andrew Stoltmann, a Chicago-based attorney who represents consumers in fraud cases.

“If they’re not, that’s the uber-red flag,” Stoltmann previously told CNBC. “If not, it could be some guy cold-calling from his mom’s basement.”

Prospective clients should also Google the advisor or broker’s name to see if any news articles about past indiscretions or lawsuits appear. If so, it’s another bad sign. The regulatory databases will also list any disclosures, complaints, arbitrations or settlements involving the individual.

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

Review account statements for other warning signs

Ask questions about investment recommendations

Look for a fiduciary, fee-only advisor

Brokers generally remain a lower-cost option relative to 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 reduce exposure to conflicts of interest as much as possible should seek out a fee-only financial advisor, according to consumer advocates.

They can search for such advisors in networks such as the National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network and Alliance of Comprehensive Planners.

Such advisors must have a baseline competency such as the certified financial planner, or CFP, designation for financial planners and only receive flat fees for their hourly service, monthly subscriptions or fees based on the assets they manage for clients, Ron Rhoades, a CFP himself and director of the personal financial planning program at Western Kentucky University, told CNBC.

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

Consumers should interview at least three different advisors after conducting a search to ensure the right fit, he said.

Source: https://www.cnbc.com/2022/06/17/sec-issues-investor-protection-rule-charges-how-to-find-a-good-advisor.html