Bad Brokers and Abominable Advisors: Two Ways to Protect Yourself

by: Joseph L. Shaefer

(My apologies to those expecting my 2nd installment of recommended natural gas companies. It's 8 pm and I’ve just returned from a high Sierra camping trip so I won’t be able to post that article until the weekend. At that time I’ll cover the pipeline, storage and distribution firms. Let’s hope our timing is as good with those as with our recent call to buy the exploration and production companies. Until then...)

... a quick post based upon speaking recently to an investor group. In the Q&A that followed, many in the audience expressed concern that “there is no way to check out a broker before he gives you bad advice.”

Au contraire! There are two separate websites I recommend to you. Both are educational in nature and will give you more solid advice than 99% of the tout letters you receive in the mail, full of boasting but short on accountability. And each lets you check out, respectively, brokers and their firms, and investment advisors and their firms.

The first is “FINRA,” The Financial Industry Regulatory Authority, found here.

From its website:

FINRA is the primary independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,800 brokerage firms, about 173,000 branch offices and approximately 647,000 registered securities representatives.

Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.

FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. It also performs market regulation under contract for The NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange.

FINRA places a great deal of investor education information at its website and also maintains a database of all customer disputes, disciplinary, and regulatory actions taken against any broker or brokerage firm. If the broker has had a history of trouble with others, you may decide there are other fishes in the sea with whom you would rather do business.

My only caution is that FINRA is an SRO – a “self regulatory organization,” which means it is there for the benefit of its member organizations. So you’ll often read about bad individual brokers – the hyenas don’t mind throwing one of their own to the lions just for fun– but you’ll seldom read really bad stuff about major brokerage firms. However, if the actions are truly egregious, even Goldman Sachs realizes bad apples are bad for business – IF they are dumb enough to get caught, of course.

The second website is the SEC’s (and, by linkage, all state regulators’ websites) that track Investment Advisors and Investment Advisory firms. It’s located here. Whether on the SEC site or the state regulatory site you may be directed to, you will find the complete “FORM ADV" – the "UNIFORM APPLICATION FOR INVESTMENT ADVISER REGISTRATION.” This is the punishable-by-law-if-fraudulent-statements-are-made form that every investment advisor must file annually describing their business, the qualifications they require for employees, their educational background, their investment philosophy, whether they have other business interests that might present a conflict of interest, how they are compensated, and much much more. If nothing has changed in a particular year, you’ll see an older “Revised as of” date going back to when a change was last made, but the information must be reviewed and certified as accurate every year.

(My firm, for instance, is registered with the state of Nevada, where we are domiciled, but we have grown too big to be able to continue listing only with the state -- this next year we will be audited and must report all changes, etc. directly to the SEC.)

Using these two sites to vet, or at least begin the winnowing process, and conduct due diligence on a firm or individual, may give you a head start on deciding whether this is the kind of person or firm you want to do business with. By turning over all the rocks some smarmy brokers and advisors have scurried under and exposing all to the glare of full sunshine, you may avoid The Dark Side.

Full Disclosure: None

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – especially so you are not over-impressed by the fact that our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running. What if this is the year we under-perform it?

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.