Only certain licensed professionals can buy, sell and trade securities for customers in the United States. Stockbrokers and investment advisor representatives, among others, are licensed and permitted to buy, sell and trade securities.
However, there is a difference between these two types of professionals.
What is a Financial Advisor?
A stockbroker is a financial professional who is also known as a registered representative or broker. They are typically licensed through FINRA and hold a Series 7 license. Stockbrokers typically trade their client accounts and earn a commission on the transactions. They do not have a fiduciary duty to their clients. Investment advisor representatives, on the other hand, are typically compensated by receiving payment based on a percentage (i.e., .75% to 1.25%) of the total assets under management for their clients. Investment advisor representatives do have a fiduciary obligation to their clients pursuant to the Investment Advisor Act of 1940. Both stockbrokers and investment advisor representatives are generically referred to as “financial advisors” or “money managers.”
What Is the Role of a Financial Advisor?
The primary role of the financial advisor is to buy and sell stocks or other securities on one of the major securities exchanges on behalf of clients. Generally speaking, there are two ways that financial advisors can gain access to the stock markets. The advisor must either individually be a member of the exchange or he/she can participate in these exchanges as a sponsored member of a brokerage firm. In either case, the advisor facilitates stock purchases and sales by being the intermediary between the buyer/seller of the security and the company. Individuals do have the option of contacting a company directly to try and purchase shares of stock, but this can be a long, drawn-out, and difficult process; one that is not easily accessible to the average investor.
What Are the Most Common Financial Advisor Complaints?
It has been reported by FINRA (Financial Industry Regulatory Authority) that the two most common financial advisor complaints are: 1) unsuitability; and 2) misrepresentation. Both of these practices are examples of financial fraud, where the financial advisor attempts to place his/her interests before the client’s interests in order to earn more money for him/herself.. The definition of unsuitability is when an advisor takes it upon himself or herself to invest a client’s money into a security that is not suitable for their investment portfolio, based on the client’s risk tolerance and investment objectives. For example, if an advisor invests a large sum of a client’s money into high-risk securities when the client has a low-risk tolerance, this is unsuitability. Another example is when an advisor sells a client an annuity when the client is looking for income and liquidity. Misrepresentation is when the financial advisor purposely omits facts and important information in relation to an investment or the sale of a product. The broker will use words and terms that are inaccurate or will leave out information that misleads clients into thinking that the advisor is making a good investment on the client’s behalf when in fact the opposite is true. Other common financial advisor complaints revolve around:
- Recommendations for inappropriate insurance related products (i.e., variable annuities or equity indexed annuities);
- High risk/high commission securities;
- Unauthorized trading;
- Churning or over trading the account in order to earn a higher commission;
- Over concentration in the account;
- Excessive use of margin; and
- The sale of highly leveraged products.
How to Properly Vet a Broker
The brokerage industry has made it easy for consumers to do background checks on their advisors or a potential advisor with whom they plan to do business. There is a website called Brokercheck that is maintained and regulated by FINRA that stores background information on brokers who have gotten into a dispute with customers that have led to arbitration. Other information that can be found on Brokercheck includes regulatory penalties implemented with brokers, history of terminations as a result of misconduct, as well as tax liens and bankruptcies associated with any advisors. It is important for individuals to take into consideration that the information on Brokercheck is considered a disclosure and is no actual evidence of wrongdoing. It is just letting the client know that a complaint has been filed against the broker. This gives the customer the opportunity to determine if the broker has had multiple complaints filed against him/her as well as other valuable information to help the investor make an informed decision as to whether he/she wants to do business with this particular advisor or not.
How to File Financial Advisor Complaints
When an investor feels like he/she has been defrauded or somehow ripped off by their financial advisor, the investor can and has the right to file a complaint. The complaint can be filed on FINRA’s website; however, the first step that should be taken before filing a complaint is to immediately contact the firm for whom the broker or advisor works and speak directly to the broker/advisor. This way you can ask about any transactions that you do not understand or did not authorize, and allow the advisor to provide an explanation. Once you have contacted your advisor, if you believe the response provided is insufficient, the next step would be to bring the issue to the branch manager or compliance department of the firm. The best way to submit your complaint to the branch manager or compliance department is to do it in writing and make sure you keep copies of all correspondence between you and the brokerage firm. If the issue is not resolved to your satisfaction, this is the time to file your complaint with FINRA.
If you believe you have lost money, or suffered damages, due to the conduct of your advisor, you should immediately contact a lawyer to assist you with your potential claim. If you would like more information about Schwartz’s Investor Advocates, please contact us or complete the form below and we would be happy to have one of our lawyers contact you for a free consultation.
