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How to ensure broker's honest

McClatchy-Tribune Information Services

April 14, 2014


When New York financier Bernard Madoff was sentenced to life in prison for masterminding one of the biggest investor Ponzi schemes in U.S. history, it was an unnerving reminder that entrusting your money to a professional can be risky. Last week, five former employees of Madoff’s investing firm were found guilty of helping him execute fake trades and phony documents, which contributed to the estimated $18 billion fraud.

How do you know your broker is ethical, responsible and looking out for your best interest? The truth is, you often don’t.

That reality was hammered home in recent weeks by reports in the Wall Street Journal and by a group of attorneys who represent small investors in lawsuits. Both rebuked the investment world’s regulatory body — known as FINRA — for not doing enough to disclose bankruptcies, tax liens, financial fraud and other red flags in some brokers’ histories. Specifically, they criticized FINRA’s online tool, BrokerCheck, long considered the gold standard of regulatory disclosures, which allows consumers to check on the education, credentials and disciplinary history of any broker. While easy to use, either by phone or typing in a broker’s name online, BrokerCheck doesn’t include every detail.

And those details — bankruptcies, criminal charges and firings — should be there, say critics. In its March 6 report, the attorney group, Public Investors Arbitration Bar Association (PIABA), said the omission of missing details "is so serious that unwitting investors relying on BrokerCheck may very well select brokers with whom they would not do business if they had access to the more complete picture available to FINRA but now being hidden."

That criticism is echoed by Jack Waymire, who runs Paladin Registry, which compiles a nationwide database of brokers who meet its standards based on education, credentials, ethics, business practices and other factors.

"BrokerCheck stops well short of providing full disclosure and transparency," said Waymire, a former investment adviser who has written a book, "Who’s Watching Your Money?"

"The reality is, Wall Street spends millions fighting full disclosure," he said. "If (FINRA) said it was going to mandate full disclosure for every (broker) out there selling financial products, they could solve that problem overnight."

In response to its critics, FINRA posted a statement on its website last month: "While BrokerCheck is not perfect, FINRA remains committed to improving the system to help investors obtain free, unbiased information about investment professionals and firms." It said FINRA has "committed considerable resources and made significant enhancements" in the past five years to make the site more "user-friendly" to investors so they can make informed decisions about whom to entrust with their investment dollars.

FINRA noted that it does not report bankruptcies that are more than 10 years old nor does it show tax liens that are older than seven years, in accordance with regulatory standards. And if a broker has been fired, the information is not posted, unless it’s related to financial malfeasance.

So what’s an investor to do in searching for a trusted adviser with a clean record?

Do your homework.

"Even if it’s not 100 percent complete information, BrokerCheck still has valuable information that can help people make an informed decision in choosing a financial professional," said Mark Leyes, spokesman for the California Department of Business Oversight, which oversees financial professionals in the state.

Likewise, Waymire also says that BrokerCheck, while falling short of full disclosure, "is still the best system available."

In addition to using BrokerCheck, he said, investors should always ask questions and get answers in writing. Among those questions: What is your education and what are your credentials? How are you compensated (fees, commissions, etc.)? How much will be deducted from my account on an annual basis? What services and written reports will you provide?

"Most people hire advisers based on sales pitches and verbal verifications, said Waymire. Get everything in writing, so if there’s a dispute later, you have documentation of what was promised.

Even Madoff could have been detected, said Waymire, because there were enough red flags in his SEC reports to warn investors away. "Just a little bit of due diligence would have helped, and (investors) wouldn’t have put a penny with him."

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DOING YOUR HOMEWORK:

Where to check on financial advisers:

—Certified Financial Planner Board: The CFP board enforces ethical standards among its 69,000 members. To search a CFP’s disciplinary history or bankruptcy record, go to: LetsMakeAPlan.org

—FINRA: Created by Congress, the Financial Industry Regulatory Agency oversees more than 632,000 U.S. brokers. Its consumer tool, BrokerCheck, lets you search for financial advisers by name to check for disciplinary actions, bankruptcies and certain criminal records, along with licensing and employment history. Go to: http://www.finra.org/BrokerCheck or call 800-289-9999.

—SEC: The federal Securities and Exchange Commission website lets consumers look up records on individual investment advisers, brokers and firms on its "Investment Adviser Public Disclosure" page at http://www.adviserinfo.sec.gov

—Paladin Registry: Started by former investment adviser Jack Waymire, it’s a consumer-oriented site that vets thousands of brokers nationwide, based on education, ethics, business practices and other data. http://www.paladinregistry.com/

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