Doing your due diligence through research
When searching for a Brokerage firm or Investment Advisor, many investors turn to the internet to determine whether or not they will do business with a firm — scouring for good and bad reviews, watching videos, and weighing the services provided. But, what if you want more than anecdotal evidence to investigate if a firm has a clean track record?
What is BrokerCheck?
BrokerCheck is a tool provided by FINRA, the Financial Industry Regulatory Authority. Through the BrokerCheck online database, consumers can check whether a broker (the firm which acts as your intermediary to transact in securities) or their representative (a sales or trading agent) is appropriately registered to deal in securities transactions. Commonly utilized brokerage firms include Charles Schwab, Fidelity Investments, and Vanguard.
Further, the BrokerCheck tool allows you to investigate complaints against brokers and their representatives, arbitration history, length of establishment or employment, and any regulatory actions taken against either.
But wait, who is FINRA?
FINRA is a privately held non-government US corporation that acts as a self-regulatory body for the brokerage industry, its registered representatives (employees), and the US Stock Exchanges, including the NYSE and NASDAQ.
FINRA was formed in 2007 when the NYSE and NASDAQ self-regulatory bodies merged into a single entity with a mission “dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based service.”
So, in other words, whenever you buy or sell stocks, bonds, futures, or options, FINRA governs over the people and companies that process your transactions to ensure fairness and compliance.
Who makes up FINRA, and how is it funded?
Well, FINRA is an organization that requires membership by any person or company that wants to transact securities within the US. Governance of FINRA comes from its Board of Governors, which includes FINRA employees, member firm representatives, and elected officials.
(FINRA runs elections for elected officials, and member firms cast votes.)
FINRA collects fees from firms and imposes financial penalties on them when wrongdoings occur to finance its governance.
A self-regulating industry? Uh…
For better or worse, the securities industry is generally self-governed by FINRA. However, FINRA is granted its authority by the Securities and Exchange Commission (SEC).
The SEC is a government body that can bring civil cases against wrongdoers and utilizes the Justice Department to file criminal suits. Furthermore, its mission is to protect consumers, which it does through FINRA, its workforce, and congressionally appointed powers.
Therefore, the financial markets do not fully regulate themselves, as they have a government beholder.
And, speaking of the SEC, this government organization runs the other tool mentioned above, the IAPD website.
What is the IAPD?
The IAPD is formally known as the Investment Adviser Public Disclosure website and is a database that allows consumers to research Investment Advisors (firms) and their Investment Adviser Representatives (employees).
Consumers can review firm and representative registration, conduct, history, and (some) disciplinary disclosures through this database when weighing if they want professional investment management.
Data on the IAPD website comes from the SEC and the State Securities Regulators. Notably, not all advisors must register with the SEC or state regulators, but they likely must if they work with the general public.
What is the SEC?
The Securities & Exchange Commission is a government entity that derives its governance and enforcement power to protect consumers through the US Congress.
The SEC regulates Investment Advisors that (usually) manage $100 million or more in assets (in other words, the big fish). Notably, some firms, including Fidelity, Schwab, and Vanguard, are Brokers and Investment Advisers!
Furthermore, the SEC also oversees FINRA.
But wait, if the SEC regulates FINRA and more prominent Investment Advisers, who keeps an eye on the smaller Investment Advisers?
Enter the State Securities Regulators.
Who are the State Securities Regulators?
The State Securities Regulators is a blanket term encompassing each State’s governing securities body. Each State regulator oversees securities only offered within their State’s boundaries to protect residents.
Furthermore, State Securities Regulators oversee Investment Advisor firms that (usually) manage under $100 million in assets.
You are now ready to investigate firms
You now know about the two tools that any consumer considering a Brokerage or Investment Adviser firm should use before utilizing their services.
Remember: BrokerCheck is for information on Brokerages, while IAPD is for information on Investment Advisers (IA).
Additionally, do searches online to see why others have liked certain firms over others. And while regulatory bodies and other consumers can assure you that a company has a clean track record and good services, only you can determine if you are ready to trust a firm.
As the old saying goes, “if something sounds too good to be true, it probably is.” So, don’t fall for Bernie Madoff-like schemes and introductory offers that become lackluster once your trial is over.
As always, have a great day!
Mile High Finance Guy
finance demystified, one mountain at a time