The U.S. Securities and Exchange Commission seal hangs on the facade of its building September 18, 2008 in Washington, DC
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Customers risk being duped, or at the very least receiving poor service, if they fail to carry out research on a financial adviser before placing their investments with him or her, a recent report confirms.

According to a working paper by professors from the University of Chicago Booth School of Business and the University of Minnesota released in early March, about 7 per cent of US financial advisers had a past history of misconduct.

The study found that prior offenders were five times more likely to engage in additional misconduct than the average adviser.

The researchers defined misconduct as disclosures related to terminations of advisers’ contracts after allegations, regulatory, criminal or civil final dispositions, and customer disputes that were either settled or resulted in an award or judgment.

So how should investors go about their selection process? To begin with, says Scott Tiras, a financial adviser at Ameriprise Financial, “you don’t pick the first person”.

Before entering a relationship with an adviser, it is important to have a clear understanding of what fees are being paid to the adviser, to the adviser’s firm and to the underlying investment managers, says Brett Bartman, an adviser at RBC Wealth Management: “Anyone who doesn’t want to provide complete transparency, I would not hire.”

Some advisers operate on a fee-only basis, charging an asset-based or flat fee for investment advice.

In contrast, under a commission-based relationship, brokers are paid commissions for selling products to clients. Many advisers operate in a hybrid capacity, offering fee-based investment advice in some cases and selling products for commission in others.

Some advisers operate under a fiduciary standard, which requires them to act in their clients’ best interest, while others operate under a suitability standard which requires them to offer investments that are suitable.

An adviser should also be willing to disclose all conflicts of interest, Mr Tiras says.

“The client always needs to feel like the adviser is putting their interest first,” Mr Tiras says. “If there are conflicts, those conflicts need to be discussed up front.”

While doing their research, investors may also want to evaluate an adviser’s expertise. Credentials such as the Certified Financial Planner (CFP), or Chartered Financial Analyst (CFA) are not required for financial advisers, but they can show a commitment to gaining the right skills.

When in doubt, investors could benefit from bringing in a third party to review the financial adviser’s investment proposal, Mr Bartman says. Attorneys and accountants can be helpful outside resources, he adds.

To safeguard against malpractice, investors can check to see whether an adviser is licensed and also learn about past regulatory problems or client complaints using free databases. The Financial Industry Regulatory Authority (Finra) has a website that allows investors to check a broker’s history.

The Securities and Exchange Commission’s website also contains information on investment adviser representatives. The North American Securities Administrators Association (Nasaa) website directs investors to state securities regulators.

These resources can show whether an adviser has been named in regulatory actions, has been fired because of his or her conduct, is subject to client complaints, or has suffered personal bankruptcies or other legal issues. Checking all three can often give the fullest picture of an adviser’s regulatory and compliance history.

Looking at past disciplinary records does not always tell the full story, but can help investors avoid advisers who might be risky to deal with, Mr Bartman says. “[A search of regulators’ databases] is not always a perfect indicator of what people are like, but it certainly can rule out some really bad apples,” he adds.

Ignites Distribution Research, the Financial Times sister publication that compiled the listings, says it scrutinised the publicly available records of all the advisers in this listing.

Some of those selected in the list of 400 have in the past been involved in regulatory actions. However, Ignites Distribution Research says it “excluded any advisers whose records gave cause for serious concern due to citations against them that were either repetitive or severe and recent in nature”.

Even a simple internet search is a good idea, advises Mr Tiras from Ameriprise.

“Putting the individual’s name into Google and seeing what you will find will take 10 to 15 minutes and you can really learn a lot about the individual.”

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