Investor Alert

Robert Powell

June 4, 2021, 4:03 p.m. EDT

Rule No. 1 when searching for a financial adviser: Trust no one

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Robert Powell

Are you planning to search for and hire a financial planner or investment adviser?

If so, how might you begin this process?

Well, given numerous research reports that highlight how easy it is for dishonest advisers to expunge their records of wrongdoing or wander from one firm to another , and how pervasive financial adviser misconduct is , and given the role that trust plays in selecting an adviser , the best place to start is with a technique used in the world of cybersecurity.

You would first adopt a “zero-trust” protocol. So says Keith Loveland, the co-founder and general counsel of the Center for Board Certified Fiduciaries.

This isn’t “trust but verify”. Rather, it’s “trust no one”. Not one single adviser. No one gets through the perimeter without going through multiple authentications, according to Loveland. 

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These bad apples, he said, are very skilled at “cultivating confidence.”

And given that, Loveland recommends another series of authentications once an adviser passes through the “perimeter.” Those authentications include but aren’t limited to you — the prospective client — interviewing the adviser’s former and current clients, branch managers, former employers, colleagues. And it includes you — the potential client — searching Google as well as reviewing Finra’s BrokerCheck , the SEC’s Investment Adviser Public Disclosure website , and for certified financial planners, the CFP Board’s website . You might even ask for the adviser to provide you with his or her background check, or provide you with a copy of their bond and errors and omissions insurance policy.

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In fact, no amount of due diligence is excessive. After all, we are talking about you entrusting your money to another person and it wouldn’t be wise to rely on one single factor, on one single authentication.

“What would really be good is that you don’t trust the people that you trust and that you check them out,” said Loveland. “And that’s a huge emotional hurdle.”

Why is this mind-set and protocol necessary given that most of the people in the financial and investment community are not bad apples? Well, sometimes it’s hard to tell the good from the bad given how easy it is to be bad and still be in the business.

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Wandering financial advisers

Consider: Using a novel data set of 1.2 million advisers across four major regulatory “regimes” (brokers regulated by Finra, advisers regulated by the SEC, insurance agents regulated by state insurance departments, and commodities dealers) and Colleen Honigsberg, an associate professor at Stanford Law School, Edwin Hu, a research fellow at New York University School of Law, and Robert Jackson, Jr. a professor at New York University School of Law, recently conducted the first systematic analysis of what they called “wandering financial advisers.”

And in their paper, the researchers showed that a little over a third of advisers who exit the brokerage industry remain in at least one other regime, that advisers are significantly more likely to change regimes after committing serious misconduct, and that wandering advisers with a history of misconduct are significantly more likely to engage in future misconduct.

Of note, the researchers not only offered explanations for why advisers wander but they offered policy makers concerned about the costs of financial-adviser misconduct with tools to address this phenomenon, a national database being one such tool.

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