Ethics & Compliance
You want a financial expert you can trust.
- Expertise is very difficult to measure; very few advisors have track records
- Trustworthiness is easier to measure if you know where to look
Advisors are not required to voluntarily disclose their compliance records to you. It is your responsibility to ask the right questions, check compliance records, and know good answers (benefit you) from bad ones (create hidden risks).
FINRA is the Financial Industry Regulatory Authority. It regulates advisors and firms (broker/dealers) that have active securities licenses. It also maintains two years worth of data for sales representatives who let their licenses expire. And, it maintains a permanent file on representatives who have complaints on their records.
CRD is Central Registry Depository. Every advisor, who has a securities license, has a CRD number. The CRD number is a unique identifier that makes it easy to check compliance records at FINRA.org.
SEC is the Securities & Exchange Commission. It regulates registered investment advisory firms that are responsible for more than $100 million of assets. The SEC regulates firms and not individuals unless the individual owns his own RIA firm.
State Securities Commissioners
Each state has a securities commissioner. Commissioners duplicate some of the functions at FINRA for sales representatives and they regulate RIAs with less than $100 million of assets. Most of the states operate in the dark ages. They do not have online databases and communications may be limited to telephone, facsimile, and snail mail.
In general, the various regulatory agencies respond to client complaints. They have regulations that are supposed to prevent client abuse, but they have limited resources for enforcing the regulations. The result is headline after headline that document abuses after they happen.
There are six types of complaints that appear on advisor compliance records:
- Frivolous Complaints – This is the most common type of complaint. An investor loses money and files a complaint to try to recover the losses. Investors never win this type of complaint, but they appear on the advisors’ compliance records.
- Less Serious Complaints – The advisor made an administrative mistake that did not damage investors.
- Firm Complaints – Investors file complaints against firms and name advisors in their complaints.
- Settlements I – Firms, not advisors, pay settlements to investors.
- Settlements II - Advisors pay settlements to investors.
- Settlements III - Advisors and firms pay settlements to investors.
- Suspension – Advisors are suspended by FINRA and/or terminated by their firms.
Advisors are supposed to tell the truth when you ask them questions. But, verbal information is easy to misrepresent and omit. Prudent investors require documentation that creates a written record for advisor responses.
Always check advisor compliance records before you buy what they are selling.