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posted on 03 September 2016

Updated Investor Bulletin: Top Tips For Selecting A Financial Professional

from the Securities and Exchange Commission

Choosing a financial professional is an important decision. This updated Investor Bulletin provides a few key tips to help you make a well-informed choice. A number of questions you should consider asking before you hire a financial professional are listed at the end of this Bulletin.

Should you have any questions for us, feel free to call our toll-free investor assistance line at 1-800-SEC-0330 or use our online question web form athttps://www.sec.gov/oiea/QuestionsAndComments.html.

Tip 1. Make sure the financial professional is licensed.

Always check the background of any financial professional on Investor.gov to make sure the person is licensed. Unlicensed, unregistered persons commit much of the investment fraud in the United States. You can perform a quick - and free - search through Investor.gov.

Tip 2. Find out if the products and services available are right for you.

Financial professionals offer a range of financial and investment services such as advice on choosing securities and purchasing and selling securities.

Just as a grocery store offers more products than a convenience store, some financial professionals offer a wide range of products or services, while others offer a more limited selection. Think about what you might need, and ask about what would be available to you. For example, do you want or need:

  • Access to a broad range of securities, such as stocks, options and bonds, or will you mostly want a few types such as mutual funds, exchange traded funds, or insurance products?

  • A one-time review or financial plan?

  • To do your own research, but use the financial professional to make your trades or to provide a second opinion occasionally?

  • A recommendation each time you think about changing or making an investment?

  • Ongoing investment management, with the financial professional getting your permission before any purchase or sale is made?

  • Ongoing investment management, where the financial professional decides what purchases or sales are made, and you are told about it afterwards?

Tip 3. Understand how you'll pay for services and products, and how your financial professional gets paid as well.

Many firms offer more than one type of account. You may be able to pay for services differently depending on the type of account you choose. For example, you might pay:

  • An hourly fee for advisory services;

  • A flat fee for an annual portfolio review or a financial plan;

  • A commission on the securities bought or sold, such as $12 per trade;

  • A fee (sometimes called a "load") based on the amount you invest in a mutual fund or variable annuity;

  • A "mark-up" when you buy certain investment products, such as bonds or other debt securities, or a "mark-down" when you sell them.

Depending on what services you want and on the financial services firm in question, one type of account may cost you less than another. Ask about what alternatives make sense for you. And remember: even if you don't pay the financial professional directly, such as through an annual fee, that person is still getting paid. For example, someone else may be paying the financial professional for selling specific products. However, those payments may be built into the costs you ultimately pay, such as the expenses associated with buying or holding a financial product.

While some of these fees may seem small, it is important to keep in mind that they can add up, and in the end take away from the profits you otherwise could be making from your investments.

Tip 4. Ask about the financial professional's experience and credentials.

Financial professionals hold different licenses. For example, financial professionals who are representatives of broker-dealers must take an exam to hold a license, while state regulators often require representatives of investment advisers to hold certain licenses. Financial professionals also have a wide range of educational and professional backgrounds. They may also have certain designations after their names, which are titles given by industry groups that themselves are not regulated or subject to standards other than their own. If a financial professional has an industry designation, like "CFA," you can look up what it stands for usingFINRA's Professional Designations page. Don't accept a professional designation as a badge of knowledge without knowing what it means, and Beware of False or Exaggerated Credentials.

Tip 5. Ask the financial professional if he or she has had a disciplinary history with a government regulator or had customer complaints.

  • Even if a close friend or relative has recommended a financial professional, you should check the person's background for signs of any potential problems, such as a disciplinary history by a regulator or customer complaints. The SEC, FINRA, and state securities regulators keep records on the disciplinary history of many of the financial professionals they regulate.

  • Check the background of your financial professional on Investor.gov.

  • State securities regulators also have background information on brokers as well as certain investment advisers. You can find your state regulator athttp://www.nasaa.org/about-us/contact-us/contact-your-regulator/.

Investor Checklist

Some Key Questions for Hiring a Financial Professional

Expectations of the Relationship

  • How often should I expect to hear from you?

  • How often will you review my account or make recommendations to me?

  • If my investments aren't doing well, will you call me and recommend something else?

  • If I invest with you, how can I keep track of how well my investments are doing?

Experience and Background

  • What experience do you have, especially with people like me? What percentage of your time would you estimate that you spend on people with situations and goals that are similar to mine?

  • What education have you had that relates to your work?

  • What professional licenses do you hold?

  • Are you registered with the SEC, a state securities regulator, or FINRA?

  • How long have you done this type of work?

  • Have you ever been disciplined by a regulator? If yes, what was the problem and how was it resolved?

  • Have you had customer complaints? If yes, how many, what were they about, and how were they resolved?

Products

  • What type of products do you offer?

  • How many different products do you offer?

  • Do you offer "house" products? If so, what types of products are they, and do you receive any incentives for selling these products, or for maintaining them in a customer's account? What kind of incentives are they?

Payments and Fees

  • How do you get paid?

  • How does your firm get paid?

  • Given my situation and what I'm looking for, what is the [best / most cost effective] way for me to pay for financial services? Why?

  • What are the fees that I will pay for products and services?

  • How and when will I see the fees I pay?

  • Which of those fees will I pay directly (such as a commission on a stock trade) and which are taken directly from the products I own (such as some mutual fund expenses)?

  • If I invested $1000 with you today, approximately how much would you get paid during the following year, based on my investment?

  • Does someone else (such as a fund company) pay you or your firm for offering or selling these products or services?

Related Information

For additional information, see the SEC's website for individual investors, Investor.gov, and these resources:

SEC Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio

SEC Publication: Protect Your Money: Check out Brokers and Investment Advisers

FINRA Publication: Selecting Investment Professionals

National Association of Personal Financial Advisers Publication: Pursuit of a Financial Adviser: Field Guide


The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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