Editors' Pick: Originally published Feb. 4.
As you're curled up on the couch watching ABC's Bernie Madoff miniseries, a disquieting question may come to mind.
What about the guy or gal who's in charge of my money?
If the mistakes of Madoff's trusting clients prompt you to look in the mirror and feel a little anxious, that's a good thing. Too many investors accept financial advice from people they know little or nothing about.
Considering the easy ways to vet a broker these days, there's no excuse for blind trust.
So store these tips away in case you're considering hiring a broker in the future. Or use them ASAP if you already have someone handling your money. Like Madoff's loyal clients, you could be putting your faith in the wrong person.
- Use BrokerCheck, the industry's vetting service for dummies. It's on the website of the Financial Industry Regulatory Authority, which is a self-regulatory group that's financed by Wall Street. If you're dubious about the idea of trusting a database run by an outfit bankrolled with industry money, your instincts are good. In small steps, Finra has made BrokerCheck more usable and thorough over the years. While it continues to omit lots of information, you can still get a rundown on many (but not necessarily all) of the customer complaints against a broker, and all of the formal regulatory charges against him. Here's the link to BrokerCheck. When you find your person, don't just scan the main page and leave it at that. Click the link where it says "Detailed Report." Things that would send me packing: a history of bankruptcies, felonies, or complaints about private placements, real-estate investment trusts or penny stocks. If you see the term "selling away" -- which means the broker sold customers stuff he didn't tell his firm about -- find another guy.
- Check a separate Finra database to see if your broker has been involved in an arbitration that may not have made it onto her BrokerCheck report. Brokers are brilliant at finding ways not to report stuff. Among other things, they too often have been able to get black marks expunged from their records. After a spate of bad publicity, Finra came under pressure in recent years to make expungement more difficult, but the fact is that brokers still can get problems erased. If the broker you're checking out was sued in an arbitration complaint that went all the way to a decision by the arbitrators, you should be able to find it at this link even if it isn't on his BrokerCheck. Just enter your person's name and click the box agreeing to Finra's terms.
- Get in touch with your state's securities regulator and ask for a copy of your broker's records. The states work with the same database that Finra does, but they don't erase as much information as Finra. Tell your regulator that you want to see everything in your broker's records, including exam scores. When I come across terrible brokers who are abusing clients, I often find that it took them two or more tries to pass basic tests like the Series 7. When you get to the end of the state report, see if there is anything listed under "Z" records. These are archived items that sometimes include information about regulatory investigations. You don't find this stuff on BrokerCheck. Here's a link to regulators in all 50 states where you can find your state regulator.
- Check the credentials brokers include on their business cards. A broker might claim to be a Chartered Financial Consultant, for example, but is he? The American College of Financial Services lets you check to see if someone is a Chartered Financial Consultant in good standing and other groups do the same, so check the website of any organization your broker claims to be affiliated with. (Unfortunately, the American College doesn't always pick up on negative news about a broker. I recently found one who'd been indicted in early January but was still listed in good standing two weeks later. They eliminated the guy soon after I contacted them.)
- This one will cost you money, which may not be economically feasible for you. But if you open an account with Pacer.gov, you can search its case file looking for lawsuits against your broker. We all know that brokerage firms make us sign agreements to never sue in court. Despite that, you will still from time to time find that an investor complaint gets filed in a public forum, so it's worth checking. The other thing Pacer lets you check: whether your broker has ever declared bankruptcy. Brokers are supposed to reveal that on their records, but they don't always do it.
- Finally, the easiest check of all: Google. Do a simple search of the broker's name. After that, try the name -- in quotes -- along with key words such as "complaint" or "lawsuit" or "fraud."
You can get everything on this list done in less than an hour. Most of my six tips wouldn't have helped Madoff's customers because he was a mastermind at hoodwinking the regulators along with his clients. Checking online coverage of Madoff, though, would have unearthed a prescient article in Barron's that raised questions about Madoff before the stuff hit the fan, so it pays to look under every rock.
Not everyone is so brilliantly devious as Madoff. If your broker is bad, there's a good chance you can find out about it somewhere. This list of six is a good place to start.