Registration Requirements for Financial Advisors
In this episode, Mr. White discusses the registration requirements for financial professionals, including brokers and certified financial planners. He also talks about the types of cases he commonly sees, and extreme cases he’s encountered.
Producer: Welcome to Wall Street versus Main Street, a different take on the investment show with our host Dax White. Dax White is the managing partner of the White Law Group a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida. The White Law Group has represented hundreds of investors in FINRA arbitration claims against their brokerage firms. Throughout the show Mr. White will shine a light on some of the tricks of the brokerage industry while also providing valuable information for investors on how to successfully navigate the investor/ financial advisor relationship.
Dax: Good afternoon everyone, I’m your host Dax White and you’re listening to Wall Street versus Main Street. This is a different take on the investment show. I am not a financial professional and not registered to sell securities. That is not the purpose of the show. The intent is not to provide investment advice but rather to provide information that I’ve picked up as a securities attorney representing investors and claims against brokerage firms. Information I’ve picked up over the years I think will be valuable to investors to help even the playing field between you and your financial advisor. The brokerage industry is not unlike any other industry, where there are good ones and bad ones. And I think it’s important for investors to have some understanding of who they’re dealing with, what the registration requirements are, kinds of questions you should be asking so that can be a successful relationship. We see in our practice some of the worst of the worst situations, but the reality is a financial advisor can be one of the most important professionals that you hire to make sure to set you up for a productive retirement, to grow your assets so that you can live out your life the way that you want. That person can be very important and there’s great ones out there, and so to me when we see all these various situations and there’s things in my mind I’m thinking man I really wished they would have asked this question or I wish they had known this, that’s the type information that we’re trying to pass on in the show, that’s the purpose of the show is to shine a light on some of the tricks the brokerage industry so that you’ll be prepared and they’ll be ready to ask those questions.
Registration Requirements
Each week we’ll sort of dive into a specific topic, some information I’ve touched on. This week we’ll talk about registration requirements. Because the reality of a financial advisor is, they’re not all created equal. There’s the bare minimum requirement. Here’s what you need to go out and sell securities and then there’s levels beyond that, that suggest far more expertise and obviously if everyone who is meeting with the financial advisor had that information it would seem very clear to me that you go with the one who had more training. Who had more experience and had gone through the coursework to make sure that they have the knowledge that you would need.
The brokerage industry, at the end of the day, is sales. The minimum requirement to get into the brokerage industry is very low. And unfortunately I think the expectation of investors is that they are dealing with somebody who is a financial guru or somebody who really understands the markets or is very successful, finance savvy or really good with investing or what have you. And unfortunately that’s not always the case and again it goes towards sort of the bare minimum requirements for getting into the industry.
And what are those? The main registration that any broker must have to sell a security is called your Series 7. That’s an exam that you take usually at the very beginning of your career. You graduate from college and you get brought into a training program in a large brokerage firm like a Morgan Stanley or Ameriprise or one of these. What they’re going to do in those first few months is they’re going to give you some base knowledge, they will set you up with a course on investing. Give you some materials to read and you’re going to take the Series 7 and usually the ramp up before you take that is a month, maybe two months, and the knowledge that they’re testing on in the exam is very basic. What’s a security? What’s a mutual fund? What’s a bond? What are the different features? Pros, cons, commissions, all the kinds of information. Stuff that frankly you obviously need to have to be in the industry, and my goodness, I promise you, investors that are dealing with a financial advisor would expect their advisor to have that information, but the bar is relatively low. It does not suggest expertise if you pass the Series 7. It doesn’t put you out there as somebody who has a full grasp of the market necessarily. It’s just a baseline exam just like you have on any other baseline. I’m a lawyer, I’m also a securities lawyer just by virtue of the fact that this is the type of work. But the bar that allowed me to become an attorney just tested baseline knowledge of just being an attorney generally. It doesn’t necessarily make you an expert in any particular area of law. It doesn’t at all . The Series 7 is similar to that. That’s your baseline requirement that allows you to sell securities.
Certified Financial Planners
What you could get beyond that which now we’re getting into actual expertise. Lots of training and it usually takes about five years of experience in the industry is what’s called your CFP, a Certified Financial Planner. And that has a much higher bar in terms of getting that accreditation. A Series 7 allows you sell securities but to put yourself out there as a CFP and add that CFP at the end of your signature block requires far more than your four week ramp up course, after you just graduated from college. Some of those requirements include five years work experience in the securities industry in that field. There is an education requirement. Whereas I would say the most brokerage firm probably do hire college graduates. It is not actually a requirement for passing the Series 7. It is a requirement I think for CFP. You do have to have a college degree. There’s also an exam that’s involved that is far more difficult to pass than the Series 7. I don’t know the pass percentage of the Series 7 but I would say it’s well more than 50-50. Whereas the CFP I think is more in line with like a bar exam for becoming a lawyer. Where it is much more difficult to pass and suggests a far better grasp of the market. So that’s something I wish more investors knew. If you’re taking a meeting with a financial professional who wants to sell you securities and you had some understanding of okay and obviously he’s got a series 7, he’s registered, and he shouldn’t be selling securities if he doesn’t, but who I really want is the guy who has the CFP, because that person’s got five years experience in the business, he’s taken more exams, to suggest that he has a better understanding of the market.
The other thing that is significant with that CFP is the duties that person now has to you. Someone who has a Series 7, who’s registered to sell securities as the baseline requirement when they make a recommendation, which is that an investment be suitable for you. And suitability is based on your investment experience, your net worth, your income, your assets, and your investment objective. The requirement of a financial advisor who’s got his Series 7 or her Series 7 is only that the investment recommendation they make for you is suitable based on those factors. So let’s say that you want to invest a hundred thousand dollars and you’re looking to get in the market but you don’t want to be put in one thing, you want to spread it around. So a financial advisor probably gonna suggest, let’s buy a mutual fund. A mutual fund allows you to do that, you can invest in the market but it’s multiple equities in that particular mutual fund, so that’ll diversify risk a bit. A Series 7 financial advisor can pick a mutual fund that is suitable for you and it fits into those objectives in terms of what you want, but maybe it pays a 4% upfront commission which is much more in their interest than yours. Whereas a CFP would be required to make a recommendation that is both suitable and in your best interest, as opposed to his or her. So obviously that’s the standard we want. We want to make sure that this person is looking out for you, making a recommendation that’s both suitable for you but also in your best interest and I think that’s something that not every investor who has a broker realizes. Those two things don’t always line up. If you’re working with a CFP you at least know that that’s their duty. Now that’s their requirement. That somebody who is a certified financial planner so the investment not just has to be suitable, it has got to fit into your investment plan.
They can actually draw up financial plans for you. Say, “Okay, what are your long-term goals, what are we trying to do? Are we trying to save for college? Are we saving for retirement? Are we trying to grow it so we can start a business? What are our goals?” And they can put together a financial plan to make sure that you meet those objectives. It’s not just a sales position where they’re trying to sell you a particular product.
A couple of weeks ago we had my associate come on. He’s a securities attorney that works in my office but prior to going to law school he was a financial advisor with a major brokerage firm. He talked about how for the first year, two years, he was pushed very aggressively to sell particular products. He would’ve been somebody who just got a Series 7, having luncheons, trying to meet people, trying to get people to invest with him. Part of the reason he went to law school and part of the reason he did not pursue being a financial advisor was because he had a lot of pressure to push a specific type of product that arguably was suitable but wasn’t necessarily in the client’s best interest.
So when you’re taking meetings, when you’re considering working with a financial advisor or if you already have one, ask him, are you a CFP? If they say no, why not, why didn’t you do that? We had a case a couple of years ago where a financial advisor told our client, “I gave up my CFP, yes I used to be a CFP but I gave it up, don’t worry about it.” The client had found out that he had lost the CFP license. No one would voluntarily give up the designation. To me that was a red flag and I think it was a red flag for the client as well. But at the end of the day Series 7, baseline. CFP, those are the guys who have been in the business for a long time and have that knowledge base that you really want. You’re handing over your life savings to somebody. Let’s make sure they know what they’re doing let’s make sure their duties to you are in line with what you expect. I think every client who calls us, the expectation was that the financial advisor was looking out for them. I don’t think any financial advisor sits down says, “Hey, I’m going to make recommendations that are suitable but I’m also make sure that they pay me well.” I don’t think that any broker has ever had that conversation, so let’s make sure that that the advisor you’re meeting with actually has the same objectives that you think they do. CFP would be a good one to check on, make sure they’ve got that.
If you want more information on how to become a CFP or what the requirements are to become a CFP, check out CFP.net. That sort of breaks it down and shows you in great detail why the CFP is so significant. Why that’s the type of financial advisor you would want. If your broker doesn’t have one but it’s because they been the business for four years, and are working on taking the test, maybe that’s not a red flag for you. But I do think it’s an important question. The other place where you can find information, or you can even find out how they did on their Series 7, you can find out their past score, how many times it took them to take it, these might be red flags for you too. If the person took four times to pass the Series 7, you can find that information on what’s called their FINRA broker check.
FINRA Broker Check Data Base
I know I’ve mentioned this in past episodes but that’s the one thing I wish every investor knew, which is the existence of the FINRA broker check and that’s gonna be at FINRA.org, top right hand of the page, it is going say, broker check, and you can type in your broker’s name and pull up that report. That report has all the information that you would want to have on your financial professional. How they did on licensing exams, including a series 7, how many times it took him to pass it, whether or not they’ve ever declared bankruptcy or charged with any kind of crime. Have they ever been sued by a client, have they ever been investigated by a regulator. All that information is on their Broker Check and again, I wish every investor would look at that before they work with somebody or if you’re already working with somebody, go look him up. Because the reality is, if you’ve got a broker whose been sued 30 times, that’s not somebody you want to trust your life savings with. And if you knew that information before you got involved with them, you probably wouldn’t be with them.
So that’s some information I wish people had. When we come back I’m going to dive into some war stories. There’s been some chatter on our website that people would like to hear the type of cases that we see and give me an example of something that you’ve seen in your years of doing this. So when we come back that’s what we’re going to do.
Welcome back to Wall Street versus Main Street, I’m your host Dax White, today we’ve been talking before the break about the different levels of accreditation for becoming a financial advisor and what’s the lowest bar, what’s the highest bar and why that’s significant in terms of picking who we are going to trust your entire life savings with.
Types of Cases we see
As I mentioned before the break we’ve had some requests through our website that I sort of dive into some war stories and talk about the types of cases we deal with. The garden-variety case that we see is typically one of two things, either just a negligent situation where the broker made a mistake. Maybe he thought that the energy market was going to do great and over-concentrated a portfolio for an investor and at a time where, if you’ve been following energies have been hammered over the last year. And maybe there wasn’t anything nefarious there but that was certainly a bad call and there’s requirements in terms of suitability and how to allocate portfolios. If you got a 35-year-old doctor whose making a half million bucks a year and he’s got a $200,000 portfolio and he told the guy, I want to be aggressive, than over concentrating in energy money just might have been a bad call but that’s not necessarily negligent. Maybe that is in line with their objectives. But if you’ve got a 75-year-old retiree who’s looking for income and the advisor set up and over-concentrated portfolio in energy because there is junk bonds out there that are paying 7-8% and he thought he could get some more yield and that person gets hammered by the energy market. Now that’s something that probably rises to the level of negligence, just based on again what are the suitability requirements when making a recommendation for an investor. And again those are age, income, investment experience, investment objectives, net worth, and again, if you got a retired investor who maybe they’ve got a million dollar portfolio they need 40 or $50,000 a year to live on. A portfolio that’s got 60-70% of that in energy with a huge exposure to that sector and then depending on the types of investments now maybe they’re all equities, maybe they’re options, maybe they’re junk bonds. Now you’re talking about something that maybe that’s a negligent portfolio and if that investor loses money that something that we can probably help them with.
When a Financial Advisor is Seeking to Defraud an Investor
The other types of stuff we see are fraud. Where it’s actually a financial advisor who is seeking to defraud an investor, either by making specific misrepresentations to put them into a product that doesn’t make sense, but pays the broker very well. Or maybe they’re dumping their bad investments on clients. Maybe they’ve got an undisclosed relationship with the investment sponsor that they’re pushing to a bunch of clients. Maybe it’s a Ponzi scheme. Those are other types of stuff where we get involved going after the brokerage firm that had the responsibility for supervising that broker who is doing that and so it’s usually one of those two things. Where it is either just a negligent situation where they screwed up and that’s why they have errors and omissions coverage, most of them, to cover that type of thing. Or where you’ve got somebody who was actively committing a fraud. For my perspective I take more satisfaction, I have done both, I represented brokerage firms and I represented investors. I much prefer representing investors across the board, regardless of the type of case, just because I took no pleasure in representing brokerage firms and sort of screwing the client again or helping the branch manager increase his bonus by paying out as little as possible, these types of claims. So regardless, I prefer being on the side representing investors but when it’s a negligent situation, maybe you’ve got a younger broker who got in over his head, didn’t really understand some of the things that are happening in the economy from a macro standpoint and just sort of overexposed their client but didn’t mean to, they weren’t looking to take advantage and a I still am a strong advocate for my client and they still deserve compensation. But I take much more pleasure when it’s when we talk about fraud I feel like I’m policing the industry and an and removing somebody who should not be out there selling securities to people who are not who’s not following the rules and who’s actively trying to take advantage of people to pay themselves more.
The Connection Between the Commissions & Greed
That’s generally where we see, in most cases that’s the nexus, that’s the connection between the commissions and the greed. If you’ve got a high commission product and a broker who is trying to take advantage of that by pushing products, by misrepresenting them and saying hey this is going to provide income, this is very conservative don’t worry about the literature don’t worry about the disclosures they have to say that, trust me this is a great product. That’s where we see the majority of our cases. Whether they’re private placements or non-traded REITs or oil and gas limited partnerships, mutual funds even. The product is not usually the nexus of the case. It’s the commissions. It’s why was that advisor making that recommendation. Why were they pushing that product. And the answer is usually because they could sell that to you for 7% commission and let’s say it’s $100,000 are investment their making $7,000 as opposed to a blended portfolio where maybe they would have made 1,000 bucks. And so you’ve got somebody who’s trying to really maximize their commissions at the expense of the client. That’s the garden-variety case. But in terms of a war story which is what people had requested I’ll just go into one. It was one of the first cases ever worked on.
I was working for another lawyer who does exactly this type of work and he told me at the time he said look they’re not all usually like this. This is the in particularly. This one is really egregious. But it’s still sets the bar for me as just wow, I can’t believe this kind of thing happens. But it was a financial advisor at large firm he was actually the manager that particular office and had a gambling problem. And unbeknownst to clients, when he needed to pay his bookie he would go into client accounts and transfer the money from their account to the bookie’s account who also had an account that same firm. Then he was sending out fake statements to hide what he is doing. This went on for several years before he finally got caught. We got involved it was more convoluted because some of the clients that were being taken advantage of were his wife’s parents. So you have like a family dynamic but it was a crazy situation, but that’s the extreme where you come in, that’s obviously fraud. That’s a situation where somebody’s taking advantage and there were so many nuances to the case it made it even more interesting than our garden-variety case.
Supervision
We did investigate the financial advisor to see if there was a pattern. One of the elements of these types of claims is supervision. So is there something that the brokerage firm should have picked up on years before. You know that they’re going to argue, well how are we going to know he’s sending them fake statements if he’s doing it from his house or whatever. How coud we have known he was doing this. So again were looking for red flags one of the red flags that particular case was that he had been charged with defrauding an innkeeper which is a very innocuous charge. Who knows what that means. But we came to find out that it was actually because he had run up a $40,000 bill at a gentlemen’s club and refused to pay it. And then the very next day to pay that bill transferred money from our client’s account into his account to pay it.
So again that’s the extreme example but you that’s the kind of stuff that we see on a daily basis where again the industry did not like anything else there’s good financial advisors balance. I know plenty of great financial advisors that take care of their clients. We see the worst of the worst and that’s for sure one of the worst of the worst, but that’s the kind of stuff that we see.
If you want more information just generally on our practice or on the information I think is important to investors as they embark on a relationship with a financial advisor check out our website at WallStreetvMainStreet.com or you can go to our law firm website which is whitesecuritieslaw.com and if you have questions feel free to send them to us and we’ll try to answer them in upcoming episodes.
Producer: You’ve been listening to Wall Street versus Main Street. The views expressed by the tooth and the program of their own and do not represent the views as nor endorsed by the White Law Group, its officers, directors, employees, agents, representatives, shareholders, nor any of its subsidiaries. None of the content should not be considered legal advice. As always consult a lawyer.
This transcription has been created by Dragon Software. There may be grammatical or translation errors.
