A client referred her mom to me for help with an essential task in her financial journey – the selection of a financial advisor. Her mom had a long-standing relationship with a local advisory firm and her designated advisor left very abruptly. She was faced with a decision – leave and follow her prior advisor (to a new firm) or stay with her existing advisory firm and be assigned a new advisor on her portfolio.

There were numerous consideration points that we discussed during our time together – including a review of the past advisor’s performance and the details of the prospective advisor’s proposed investment approach. We also revisited her goals and objectives and discussed a complete list of qualitative and quantitative factors to weigh in making her decision.

As part of this exercise, I also walked her thru a broadly useful tool to conduct a high-level due diligence on the two financial advisors. Given the importance and stakes involved in money management, there are numerous US regulatory agencies governing all financial advisory firms and their employees. One of those agencies, the SEC (Securities and Exchange Commission) maintains a database for registered investment advisors and FINRA (Financial Industry Regulatory Authority) maintains one for broker dealers (note – you can use either one, they will refer you in between as needed).

Items covered within the database include:

Registration type – you will be able to see how the advisor is registered. An IA designation means they are registered as an Investment Adviser (meaning they sell advice, versus products). A Broker designation means they are registered to sell products as well (insurance, annuities, etc). If an individual has both listed, you will need to verify how you and your portfolio will be treated

Credentials – The examination section of this database lists exams the individual has passed that are administered by regulators (Series 65, series 7, etc). Each of these exams grant various rights (right to give financial advice, right to sell products, etc). This seciton may be blank for some advisors (like me!) as professional designations of a certain level exempt advisors from these tests.

To see professional credentials, you need to run the optional Detailed Report off the site. Professional designations may include CFP, CFA, and CIMA. CFP (Certified Financial Planner™) professionals have completed university-level financial planning coursework and passed a 10-hour exam covering nearly 90 topics, from group medical insurance to derivatives. CFA® (Chartered Financial Analyst®)CFAs must pass three exams, each of which demands a minimum of 250 hours of study and includes corporate finance and financial statements.  CIMA® (Certified Investment Management Analyst®)CIMAs focus on asset allocation and typically complete final coursework at the Haas School of Business at the University of California, Berkeley, or at the University of Pennsylvania’s Wharton School of Business. 

Disclosures – the disclosure section will list any regulatory matters that required reporting. This may include criminal charges or disciplinary actions brought against the individual. In a business built on integrity and trust, this section must be reviewed. Ideally this section is blank but if it is not, ensure that you review the findings and seek to understand if they have any impact on the ongoing management of your funds

Licenses – this section will outline which states the advisor is licensed to practice in and what firms they are affiliated with. Keep in mind that even if your state is not listed they may be able to work with you (as some states have a de minimis threshold for registration)

Experience – Advisor’s professional background will also be listed, including the various firms they have worked for

Firm details – there will also be a link to the SEC site of the individual’s current advisory firm. Advisory firms have to publish reports annually (Form ADV and Form CRS for SEC regulated firms) that contain valuable information about the firm and their practices. You can access these documents from that link as well

Using this due diligence tool for my client’s mom, I was able to share with her some key facts related to the two individuals she was evaluating. Well this won’t answer all the questions or complete an evaluation, it is certainly a good place to start. If you are ever asked to review a financial advisor for a friend or family member, you may find this to be useful as well!