Wall Street V. Main Street Podcast – Episode 5

Wall Street V. Main Street Podcast – Episode 5 – How to Vet and/or Fire your Financial Advisor

In this episode, Mr. White discusses How to vet your financial advisor and how to fire your financial advisor

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 and throughout this 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: Welcome everyone. This is Dax White.  You’re listening to Wall Street versus Main St.  As our intro indicated, this is a different take on the investment show.  We’re not here to be giving out investment advice. I am not a licensed professional to sell investments but rather a securities attorney who represents investors and claims against brokerage firms.

The objective of the show is to pass on information that I think, based on my experience in dealing with brokerage firms in the litigation context, information that I think investors might be valuable to them in evening the playing field in that relationship. Information that would make it a more beneficial relationship between you and your advisor.

Tips that would give you some information on maybe what their motivation is, why are they trying to sell me this product and try to shine a light on some of the tricks that they use so that you’re better protected and more informed when you get together with your financial advisor.  So that’s the objective of the show.

Each week we will tackle some various topics. This week what we’re to focus on two things.  How to vet your financial advisor, how to pick the right financial advisor, and if you’ve got the wrong one, how to fire him.

How to Vet your Financial Advisor

So we’ll first jump into “how do we vet our financial advisor?”  The industry is set up to make it seem as if all these guys and girls who are selling investment products are super successful, finance majors, vice presidents.  All these things are done intentionally so that you’ll trust them and think that they are investment gurus who will be great with your money.  And the reality is that’s not always the case.

That’s just sort of the illusion of the industry and so it’s important to ask the right questions to make sure that you’re getting the right professional.  The reality is the brokerage industry, just like any other industry, has good financial advisors and bad financial advisors and hopefully what we’ll go through here for a few minutes are some tips on how to make sure you’re getting the good one.

Because I do hear it all the time, after fallout, after you’ve been with a financial advisor who has taken advantage of you and you’re talking to a securities attorney like me.  “I trusted this person; I thought they had my best interest in mind.  They were a vice president and I just assumed that they would take care of me.”  And unfortunately that’s not necessarily their obligation.

The fact that they are a vice president is not necessarily a designation of anything other than that they are a successful revenue generator for the firm.  That’s typically how that designation comes.  So we need more before we pick an advisor and we need to know what some of these things are so when we are dealing with someone we have a sense of whether or not we’re with the right person.

The first thing that I would recommend that people do before picking a financial advisor, let’s say that you’re talking to one. You should be talking to more than one. You should meet with multiple people before establishing a broker-dealer brokerage relationship.   Find somebody that you’re comfortable with but don’t just settle on the first one.

The first tool that you should be using to vet your financial advisor is something called FINRA broker check.   And I know I’ve mentioned it in previous episodes but it’s so important that I just keep going back to it because unfortunately it’s something that not every investor is aware of.  But it is a publicly available tool.

You can go to FINRA.org and at the top right-hand corner of that website there’s something called the broker check.  And you can literally type in a person’s name, hit enter and you’re going to get what’s called the broker check report which will detail all the information that you would want when you’re vetting your financial advisor.

It’s going to have, “How they did on their licensing exams, where they have been employed, where they went to school, if they’ve ever been charged with anything criminally.  Have they ever declared bankruptcy?  Have they ever been sued by a client?  Have they ever been fired by their brokerage firm?”  All things that would be absolutely critical before establishing a relationship with somebody who’s going to manage your entire life savings.

Obviously I see it all time, somebody calls into the firm and we’re doing an intake and they give us the name and we’re looking them up. The first thing we do when we’re talking to an intake, we look up their broker check report and we’re rattling off all this information to the potential client and they’re like amazed that we know this and we’re not Svengalis. I don’t know every financial advisor.  Literally all we’re doing is pulling this publicly available information and looking at the report. And so many times you’re telling a potential client, for me, on the litigation side, about their financial advisor and they are in horror.  You say, they been sued 26 times. They say “I had no idea.”  Obviously that would be critical information at the beginning.

If you pulled that report, if you are aware of that report, if investors generally were aware, and I will give FINRA credit, they are starting to run some ads on this to get awareness out there about the existence of this report. But if it was generally known in the investment community that “Hey, I can pull a report on my broker or somebody I’m considering using and you pulled that report and find out that person had been sued by 26 of their former clients, I feel confident that none of you would establish a relationship with that person.  That none of you would give your life savings that person.  So obviously that to me is the first thing that you should do, pull that report.

I will say if you’ve got a financial advisor that has been in the industry for 20 years and he’s been sued once, that to me is not a red flag.  The reality is if you’ve been in the business long enough you may have come in the crosshairs of an attorney or had a client complain about something, so that to me is not a red flag.  But when you start seeing multiple customer complaints, multiple instances where the broker’s been sued that’s where it can be a red flag.

Particularly if it’s a consistent MO.  You can read exactly what those lawsuits were about.  If it’s the same basic product every time then you probably have a financial advisor who’s pushing specific types of products to a lot of clients.  That’s a red flag.  So that’s the first thing, when you’re vetting a financial advisor, pull her broker check report. Have that information before you go into a meeting with them and if there is a customer complaint on there, but there’s just one, ask him about it or her.

Ask them to explain it.  Maybe there’s a very reasonable explanation and that when you hear it you’re comfortable.  But have that report before you even go into the meeting.  Once you’ve done that and you’ve read it and you’re comfortable with the information in there, you see that they’ve done well on their licensing exams you see they’ve been in the industry for however many years, they haven’t been sued, they haven’t been fired, and now you’re taking the meeting.

The next step is what questions are we going to ask.  Let’s make sure you are asking good questions so that we have a sense of who this person is and how they’re going to be handling our money.

Good questions to ask would be “How are you compensated?” Not every financial advisor is compensated the same way.  Some of them are compensated on a commission basis which is per transaction.  Every time they make a recommendation for you and you agree, they get paid.  Some of them are being paid a percentage of assets under management.

If you have a million-dollar portfolio and they take 1%, they are going to make $10,000 a year. You can sort of just based on what kind of investor you are, decide which model might make sense for you.  If you’re a buy-and-hold investor, maybe a commission model makes sense for you because maybe you’re only doing two or three trades a year.

If you’re trading a lot and you’re having a very active relationship with your advisor maybe the assets under management model makes more sense.  But ask the question so that you know and it’s not ambiguous.  So make sure to ask that question first and foremost.

The second question I would ask is “does the financial advisor have a fiduciary duty to you.”  Ask them just straight out that exact question because the brokerage industry will take the position that they don’t.  Their obligation to you from their perspective is to make an investment recommendation that’s suitable.  That’s a much lower bar and an investment could be suitable for you but not necessarily in your best interests.

So just ask your financial advisor, “Do you consider yourself to have a fiduciary duty to me?”  Let’s figure this out at the beginning of the relationship to make sure I know where you stand.  Another question you should ask is, “Who are you registered with?”

A lot of financial advisors out there are sort of independent and they’ve got a “doing business as” business, wherever their offices are, but they are registered to sell securities through a larger brokerage firm. Find out who that is. Do some research on them to make sure that you’re getting involved with a brokerage firm that has the types of supervision and compliance that you would want.

There are two types of brokerage firms.  There is the Morgan Stanley model where they  have a hub of brokers in a major city.  Maybe 30-40 brokers in one office.  There’s compliance people, there are supervisors, there’s operations people.  In my experience you see less problems in that type of situation because all the supervisory people are right there.

On the flipside, the independent model, it’s a guy or girl in an office someplace and their compliance are in Kansas City or Minneapolis or St. Louis or wherever.  And they come to the office once a year and audit the books and sort of rubberstamp the activities of the advisor.  Obviously the supervision in that context is very different.  And that is the type of firm where we see more problems.

So you want to make sure you’re getting involved with the firm.  That it’s overseeing your financial advisor, protecting you, making sure that if they are doing something wrong, they will catch it before it’s detrimental to your accounts.  So find out who they are registered with, ask them if they’ve ever had disputes with clients.

The FINRA broker check is not perfect. There’s a process called expungement where a customer can file a complaint and the broker can go through the effort of having it expunged from the record.  So broker check picks up most things but doesn’t pick up everything.  So it doesn’t hurt to just ask the question, “Have you ever had a dispute with your client?”  If they say yes, ask him to explain it to you.

Again, nobody’s perfect and you can’t keep everyone happy so if you’ve got a hundred clients and you have been in the business for 10 years you might have somebody who’s been upset with you at some point.  But it may not rise to the level where it concerns you, but ask about it, talk about it.  Ask about their investment background and their objectives.  Not every financial advisor does it the same way.  You want to make sure that their goals are consistent with yours and their approach is consistent with yours.

The last thing I’d asked them is “do they have insurance?”  The brokerage industry does not require brokerage firms or financial advisors to carry insurance.   Many of them do but they are not required to do so.  Why that can be significant, of course, as if it were worst-case scenario you want at least be with a financial advisor that if they do screw up you’ve got some protection. So ask them “do you have E&O insurance for this and if the answer is no, that’s probably a red flag.

Either just because of collectability concerns if you get into a situation where you need to sue your advisor or it might be a suggestion that they are not operating their business in the best way possible because certainly I think financial advisors should have E&O insurance.  So that’s an important question.

The next thing would be warning signs, both in terms of initial meeting warning signs or just as the relationship begins.  Things that you should be on the lookout for. All things that are important in vetting your financial advisor.

It’s not just a day one thing, it is sort of like going to the doctor, in my experience, at least with hospitals, the person who cares the most about your health is you. You’ve got to be an advocate for you.  The same goes in the brokerage relationship.

You have to monitor your statements and you have to continue to be involved.  You can’t just say I picked the right person and now I’m out.  I’m going to let them handle it and I’m going to check in on the annual reports.  You have to continue to vet them and continue to make sure they are doing it the right way.

So here’s some warning signs that would clue you in to, maybe they are not the right person and I need to peel the onion further and make sure that I’m with the right person, make sure that I’m protected. Some of those warning sides would include, they rush you to make a decision.

We see this in a lot of our cases where they have you come in the meeting and say, “Sign here, here and here. I’ve got an appointment in 15 minutes.  If you have any questions call me later.”  And you call and you can’t get him on the phone.  That’s an obvious warning sign. That should be clear to most people.  But I think a lot of people are afraid to escalate it because they think, “Oh well, he’s very busy” and he makes it seem like he’s got tons of clients and he’s really successful. So maybe it’s okay that he doesn’t have time for me. No, it’s not okay.  Find someone who has the time. He is getting paid to manage your account so make him work for it.

They don’t tell you what they’re being paid.  That’s definitely a warning sign.  A lot of the products that we deal with are extremely high commission investments and obviously we’re dealing with the worst of the worst. But the point is that the commissions are an obvious incentive to the broker to recommend the product.  And if they’re not disclosing what those commissions are, that’s a problem.

Because the reality is if they were disclosing the commissions I bet you that the client would say no.  If you said to the client “Here’s my recommendation and by the way it paid me 10%” they’re probably not going to say yes.  So a lot of times they just don’t say what the commissions going to be and it’s buried in the fine print somewhere.  So if they’re not telling you, “Hey, here’s my commission.” That’s a warning sign

They want to put everything into one investment.  Big warning sign. What’s the motivation in doing that? Most people know diversification is critical when investing so if you got advisor who saying,  “Hey, let’s use this investment, it’s the best, it’s better than anything else, we’re going to do everything in this.” That’s a warning sign.

They want to meet with you alone.  Another warning sign.  What would be the motivation?  So you’re an elderly person and you want to bring your kid to a meeting and they say no to that.  That’s a warning sign in obviously if they’re on the up and up they shouldn’t have any problem with more people sitting in the meeting, making sure that you’re being taken care of.  If they’re not asking about your actual investment needs, that’s a problem.

Investments are not vanilla, every investment is not perfect for every person.

Each investment depends on your particular situation.  So if they are not asking you what your situation is – your net worth, your income, your investment objectives, your investment experience, your goals. Not asking those questions, that’s a huge red flag.

If they’re not sending you monthly statements directly from the brokerage firm, that’s a red flag.  That is something that you should be monitoring.  If the statements are coming directly from your financial advisor and you’re not seeing anything on there about the brokerage firm they clear through, that can be a problem.  That could be a financial advisor whose hiding losses or just sending you statements that are sort of not based on reality.

If they ever ask for the check to be made out to them individually that’s a problem.

Brokerage firms are established to make sure that kind of stuff doesn’t happen and so if they’re doing it I promise you, it’s not approved by their firm.  There’s a reason for it and it’s not a good one.  Whatever the stories they give you, I’m not buying it.  Based on the rules established by brokerage firms, that’s never appropriate.  If you suffer huge losses without any reasonable explanation, obviously that’s a problem. Lots of brokers will tell you “it’s the market” or “forces that are out of my control.”

That may be true but you want to talk about it and make sure that you get a reasonable explanation.  So those are some warning signs.  Those are some tips on how to vet your financial advisor.  We will  go to commercial now.  When we come back, I’ll tell you how to fire your financial advisor.

Welcome back everyone.  You’re listening to Wall Street versus Main Street. I’m your host Dax White.  Before the break we were talking about how to vet your financial advisor.  Questions to ask to make sure you’re getting involved with the right person. Obviously, entrusting your life savings with someone is an incredibly important decision and so we went through some tips on how to make sure that you went with the right person.  That was before the break.

How to fire your financial advisor

Now we are going to talk about how to fire a financial advisor.  Let’s say that you’ve decided, for whatever reason, this person “I just don’t trust them anymore.”  Whether it’s because you lost money or they don’t get back to you or they’re not answering your questions, whatever the case may be, you decided “I need to make a change.”

The good news is, the brokerage industry actually makes it incredibly easy to fire your financial advisor.  And they do this for sort of their own self-interest but obviously there is a lot of transition from firm to firm.  I don’t know what the attrition rates are offhand but it is not unusual for people to switch firms.  And so the new brokerage firm wants to make it as easy as possible so they have what is called the ACAT process.

That’s the process whereby you go into the new firm and they, on behalf of you, by you giving them authority by filling out a lot of different documents, make it incredibly easy for you to switch over because they will do it for you.

So if you reach that point where you really don’t want to be with that the financial advisor anymore. But it’s like breaking up with someone.  That can be uncomfortable.  The good news is, this is like breaking up via text. Because you don’t have to see them again.  You don’t have to go to their office and fire them.  This isn’t like a Donald Trump situation –  “You’re fired.” All you need to do is find yourself a new financial advisor.

Find somebody that you trust and their firm will take care of the process for you.  Go into the new firm, they will have paperwork for you and they will do again what’s called an ACAT process, they will transfer over your accounts.  It’s typically seamless.  Brokerage firms are set up to try to bring in new clients so they’re doing everything they can to make that process as easy and painless as possible.

And so it should be that you can meet with the new advisor, set up the account with them and they take care of the rest. So from that standpoint, that’s an easy one.  If you’re thinking that you need to make a switch, find a new person and let him do it for you.  So that’s how to fire a financial advisor.

Tune in next week where I’m going to be talking about the differences between a financial advisor and an investment advisor. Because they are not the same.  They’ve got different duties to you, different regulations.  They are regulated by different entities. There is a lot of nuanced differences there and we’re going to go through that. If you’ve got questions about some of the material we’ve been talking about, feel free to visit our website.

You can also visit us on Twitter or you can even go to my law firm’s website which is www.whitesecuritieslaw.com and on there you’ll find all sorts of information, both about what we talked about today and other resources in terms of investment diversification.  The types of commissions for various products.

Other things that we’ve put up there that we think are important for investors. But like I said, the objective of the show is “let’s even the playing field.”  Let’s make it so that financial advisors, again we are trying to shine a light on some of the tricks that they have and make it so that you are more informed when you’re having that meeting with your financial advisor.  A lot of that information’s on there.  Tune in next week and we’ll  go through that new information and thank you for joining us.

Producer: You’ve been listening to Wall Street versus Main Street. The views expressed by the participants of the program are their own and do not represent the views of nor are they endorsed by the White Law Group, its officers, directors, employees, agents, representatives, shareholders, nor any of its subsidiaries.  None of the content should be considered legal advice. As always, consult a lawyer.

This transcription has been created by Dragon Software. There may be grammatical or translation errors.