Investment Consumer Protection
What precautions should I take in choosing an investment professional?
The key concern when looking to work with an investment professional is you really want to make sure that the investment professional is licensed and that they are in good standing to do what they say they are going to do. It would be very helpful to meet the investment professional personally. Make sure that the investment professional has a legitimate business location that they're working from. Those are important to avoid being scammed in certain ways, and then you also want to make sure that the investment professional has the experience that they say they do, and that they have the licenses that they say they do.
What are the governing bodies that oversee investment professionals?
There's really three kind of main governing bodies that are overseeing the actions of financial professionals. There's the SEC, the Securities and Exchange Commission. There's the NASD, National Association of Securities Dealers. Then there's the state insurance regulators. So someone who's actually dealing with insurance products, life insurance, annuities, health insurance, they're actually going to be licensed by each individual state's insurance regulators.
What are the key questions I should ask a potential investment advisor?
The key questions that you want to ask a potential investment advisor are regarding their licenses; who are they licensed by, how are they licensed. You also want to ask them about their experience, their education, how they're compensated, if they have any conflicts of interest relative to providing you advice, and who they may work with. Ask for a copy of their ADV, and find out if they are a fiduciary, meaning if they are going to take a legal responsibility to put your needs ahead of their own. You also want to say ask if they've ever been disciplined at all, meaning id there have been complaints filed against them, if they've ever lost their license, if their license has been suspended. Really, you just want to make sure that someone is properly licensed to work with you and there haven't been complaints filed against them or other issues that are going to put them in question, relative to their integrity as well as quality of work that they might do for you.
What is an "ADV"?
In order for an individual to be registered with the Securities and Exchange Commission, they have to complete a form. That form is called the ADV. There's a part of that ADV form that's in schedules that registered investment providers are required to give to their clients, and that ADV is going to list conflicts of interest and how they're compensated. It's going to provide a lot of the detailed information that you want to find out about a financial planner. If the investment professional doesn't have an ADV, then that's a clear sign they're not registered with the SEC, that they're actually registered with the NESD and they're a stockbroker.
What are the risks of investing based on a "cold call"?
When you're investing based on a cold call, your real risk is that you don't know the individual who is talking to you. So you really don't necessarily know their experience, their history and what they might be trying to do. Not only do you not know that individual who's calling you but that individual really doesn't know you either, so it's difficult for them to truly and honestly be calling you and saying, hey, I've got this great investment that's just perfect for you because they really don't know. So for most part it's really a shot in the dark. It's a random process and really good quality professionals, they're not cold calling anyway and so the chances of you getting somebody who's really going to sit down and spend the time to understand your situation and make recommendations appropriate to your situation is going to be difficult through a cold call type of process.
What are the "red flags" regarding a dishonest stock operation?
Some of the biggest red flags that you need to think about are common sense. If something sounds too good to be true, it definitely is. Another red flag would be, "We have to do it today," or "It has to happen this week." That's really a sign that if someone's trying to rush you into a process, a big red flag that it's probably not an appropriate investment strategy for you.
What conflicts of interest must a broker avoid?
When you're dealing with a broker licensed with the NASD, there aren't a lot of rules relating to conflicts of interest. The very nature, the very structure, is inherently full of conflicts of interest. If you're working with a registered investment advisor, it's a different story where, first of all, they have to disclose all their conflicts of interest to you. And there's a lot of conflicts of interest they just can't take. They can't take payment for the sale of a product, which would be one of the classic conflicts of interest.
What is "churning"?
Churning is the process of buying and selling a lot of securities in your portfolio. And when someone is compensated by commission, they're compensated by those trades. You might find them churning your portfolio, do a lot of buys and sells to increase their revenue.
What do I do if my advisor appears to be churning?
If it appears that your broker is churning your portfolio, the first thing you should do is to call the broker and tell him to stop churning, say, "stop placing all trades." You should probably also speak with the branch manager, your broker's boss, and tell him that same instruction, to stop churning, "stop placing all trades." You might want to follow that up with a letter or an email and at that point, I would think you may want to go out an seek another financial professional to work with.
