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Looking for a Good Financial Advisor

We're back from a much-needed vacation on Cape Cod where the sun was high, the weather way dry, and the living was easy.

Now it's back to work, and I want to pick up on the theme of getting ready to invest.

I talked last time about the importance of doing your homework, but focusing on stocks or mutual funds you might buy isn't the entire enchilada. You also have to check up on the financial advisor or the broker who is handling your money.

Remember, even when you are trading online, someone, or someone’s computer system is at the other end of the transaction. Obviously, you should check out an unknown, smaller, or perhaps less-established brokerage house or financialy advisory firms very carefully. You should also, however, ask questions and be well versed in what the investment process is within a large, established company. Many people make the mistake of assuming that because the company is a household name with numerous commercials featuring lions or bulls on your television set, they will automatically do well by you. These companies have massive lists of investors and you are, in effect, another number in their computer bank. This doesn’t mean they won’t make money for you. But, since your money is far more important to you than it is to them, it means that you are entitled to ask questions and make sure you are comfortable with the responses. High-pressure sales pitches and an approach that makes you feel stupid for asking a question is not what you want from a firm in which you want to put your savings. A comfort level, therefore, is important to most investors, especially new ones.

Besides studying up on the companies you are investing in, you can research potential financial advisors. Large financial companies have been known to invest money in the wrong fund, neglect to start a direct deposit, or fail to send financial statements. Some have even completely lost an investor’s entire account. Thank goodness this is not typical activity, but it happens. Humans make mistakes and so do computers, which are essentially at the hands of humans, no matter what others tell you when they quip, “Oh, the computer must have done that.”

Millions of investments are made every year without a hitch, and yours will very likely fall into that category. However, be aware that even if you’ve researched the firm and the broker/advisor to ensure that all is “legit” regarding licensing, there are still unscrupulous brokers. But there is something you can do about them.

Take “misrepresentation”, for example. That is where the broker is telling you something about a company or an investment to get you to purchase it, when in fact there is nothing to substantiate the (sales-related) statements. “But the broker told me” is the common phrase of investors who have purchased a stock or other security from brokers who misrepresented themselves. “The broker told me that small midwestern coffee franchise was going national like Starbucks,” says the investor. The broker responds, “I never said that.” To avoid such situations, you should ask for a written plan of action explaining where you are today and where you expect to be in X number of years to reach your goal. On the other hand, you must not take the broker’s word at face value; investigate the source material from which the broker got that information. The broker should be able to tell you where you can look to find out that indeed this local coffee house is looking to go national. If the broker “can’t tell you that,” then there is something wrong with this scenario. Brokers are plugged into the market, but they do not have secret sources, unless they are doing insider trading—an entirely different matter to contend with. The bottom line is that a recommendation from a broker should be based on something that you can see in writing.

Also watch out for “commission grabs,” i.e., making unnecessary transactions to grab more commissions (the amount you pay that goes directly to the brokerage firm). There is no set number at which churning begins. In one case it can be three transactions that need not have been made, and in another instance it could be forty. The bottom line is whether or not a broker is making transactions for the sake of running up commissions. This is not uncommon, so it’s important to get valid reasons for transactions before approving them.

The easiest problem for investors to catch is “unauthorized transactions,” which is simply where a broker has made a transaction without your authorization. You should always read your monthly statement carefully, even if they are difficult to read, or have someone look it over with you. If you see a stock or security appear and no one ever discussed it with you, that is an unauthorized transaction. A broker cannot simply make moves, unless authorized to do so, without your permission. A statement such as “I couldn’t reach you so I bought it in your best interest” is complete baloney. “Well, you hired me to take care of your finances” is equal baloney. A broker is hired to handle your account as advised specifically by you.

If a broker is going to work for you, you have the right to interview him or her. Don’t be intimidated. You can ask for referrals, written research reports, and prospectus reports. Find out where the broker has worked previously and something about his or her background. You are entitled to know about the person who is handling your money. Just because the brokerage house hired the broker in good faith doesn’t mean he or she is going to act in your best interest. Again, the majority of brokers do not fall into these categories, but as in any profession there are some rotten apples.

Mediation can also be used to settle a complaint. Unlike arbitration, where a panel of three arbitrators make a decision after a hearing (win, lose, or draw), in mediation both sides enter voluntarily and try to work out a settlement. The goal is to avoid arbitration by working out a solution that is satisfactory to both sides. It’s more of a compromise than a situation with a winner and loser. If, however, one side does not feel he or she is getting a “fair settlement,” that individual can always go on to arbitration. It’s a growing area in the business that can, ultimately, save both sides time and money.

For more information, you can contact the Securities and Exchange Commission (SEC) at 1-202-942-7040. While the process is slow, they will listen to you and let you file your report. The government can terminate the license of a dealer, impose fines, or even send the broker to jail in extreme situations. The National Association of Securities Dealers (NASD) at 1-800-289-9999 is another place you can turn to get information about a particular securities dealer.

However, to get your money back if you feel you’ve been ripped off (and for faster service), you might call the Securities Arbitration Group, Inc. Their hotline number is 1-800-222-4724. They are a nongovernmental securities hotline designed to investors get a square deal from their broker or advisor.

After all, getting a square deal is job one when dealing with people who manage your money.



Published Aug 14 2006, 01:49 PM by moneycoach
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