With so many recent headlines about investment scammers and bumblers busting people’s dreams, many may be put off from investing entirely. This is understandable but unfortunate; with proper due diligence, investing is both lucrative and safe. Of course, not every risk can be entirely mitigated. But educated investors can learn to protect themselves to the point where they sleep well at night as their money works for them. One of the best due diligence tools available, investment background research databases, is brought to you by your old friend and nemesis, the federal government of the United States of America.
Always Start With Google
But before we talk about these government databases, let’s mention tapping into the vast, but simple free research tool that is Google. I basically Google anyone or anything I don’t know yet. It’s astonishing sometimes what’s revealed. In the investment realm, a client once asked me about investing in a certain hedge fund they’d heard good things about. A quick Google search revealed that, while the managers were indeed generating excellent returns, they were doing so by taking some edgy risks. BH, my client passed up this offering, as those risks indeed blew up the fund not long thereafter. Thanks, Google!
Beyond Name, Rank, and Serial Number
What if you want to hire a professional in a field like medicine, law, insurance, or accounting, and Google isn’t revealing much? What now? The most you can count on (due diligence-wise) from governing bodies is confirmation that the professional in question is licensed properly. Better than nothing, but not much. That’s why most of us rely primarily on word-of-mouth referrals to select these vital vendors. This approach generally isn’t very useful, either. A layman isn’t well-equipped to judge the competence of their doctor, lawyer, or accountant. But it’s the best we’ve got.
Finance Resumes Are Open Books
On the other hand, investors who want to do their homework on their stockbrokers, investment advisors, and money managers have a lot more to work with. The Securities Exchange Commission, or SEC, (a government watchdog monitoring the investment industry), and the Financial Industry Regulatory Authority, or FINRA, (a non-governmental organization overseen by the SEC, that focuses on regulating brokers), maintain meticulous online databases of background information. Within seconds you can review any broker or advisor’s full name, AKAs, training, current and past employment history, and records of customer complaints. These information troves offer investors a huge shortcut.
BrokerCheck + IAPD = Informed
FINRA’s system for sharing background checking on brokers is called BrokerCheck and the SEC’s for advisor pedigree is the IAPD (Investment Advisor Public Disclosure). Brokers sell investment products on commission while advisors charge fees for guiding clients. Thankfully, the two programs are cross-referenced and the reports generated by each follow a similar format. If you simply plug a prospective financial advisor’s name and location into either BrokerCheck or IAPD, their report will usually come up within one or two clicks, assuming they are properly licensed. And if an investment “professional” isn’t licensed, that itself is the most obvious due diligence flag!
Broker, Advisor, or Both?
The cross-referencing of the brokerage and advisory databases is super helpful, since the fellow calling himself a financial advisor, wealth manager, or investment manager may be legally functioning as either an investment broker, advisor, or, confusingly, both. Searching either BrokerCheck or IAPD will bring up any broker or advisor who has filed even with just the other program. The system will tell you if the “detailed” report you seek is available only on the other, along with a direct link to follow. And that itself, clarifying if the advisor is a broker, advisor, or both is very useful information.
It Really Works
These government sites work surprisingly well. Investors can usually get accurate basic facts about prospective financial advisors instantaneously. If anyone tries to fudge or exaggerate their history and experience, they will typically leave telltale hints or flags within the disclosure reports which can then be probed further. That an advisor is a newbie with minimal training doesn’t mean they aren’t worth hiring, but investors should at least know the facts. There may be a reasonable explanation for choppy employment or even customer complaints, but you should research that before entrusting someone with your money.
Researching Financial Firms
So far we’ve been focusing on researching the individuals in the investment business. The same oversight system and BrokerCheck/IAPD websites provide even more detail on the firms financial advisors work for. Using the same search box you can find any registered investment advisory firm or brokerage firm along with much detail as to their locations, owners, sizes, client types, services, fees, years in business, employees, auditors, whether they use solicitors to raise capital, the pooled capital funds they oversee, and customer complaints. Easy access to these specific details on the individuals and firms offers investors a huge advantage into securing competent, ethical professionals.
When Government Works, Use It
There’s a lot more to say about digging into these firm-level reports. But these tools are valuable and practical, even at a beginner level. A recent kerfuffle in which a financial advisor was exaggerating his credentials was easily observable via the IAPD. A quick search of his individual history raised some yellow flags which then pointed to red flags in the reports on the firm he worked for. Government oversight isn’t often well done, but, sometimes, shockingly, it does a solid job. We should use that to our advantage.