How To Use BrokerCheck Before Hiring a Financial Advisor

I’ve written before about the 6 questions  you must ask any prospective financial advisor, but asking questions is just not enough. Most people now will research a restaurant online before going to dinner. Shouldn’t you at least do the same due diligence on a potential financial advisor? Thankfully, there is a great website devoted to providing additional information on prospective financial advisors and brokers, called BrokerCheck. Unfortunately, the website is not real intuitive and can be difficult to find the pertinent information. This article will help you use BrokerCheck.com to vet a potential financial advisor.  

www.BrokerCheck.com is a website in which you can search for ADVs of any licensed financial advisor. An ADV form is required to be filed at least once a year by anyone registered as a financial advisor. You will find an ADV on both fee-only financial advisors and commission based brokers. ADVs are required to disclose such things as fees, Assets Under Management, Regulatory History, Work Experience, etc. of any financial advisor. It is a fantastic resource that not enough people utilize. Typically, there will be two ADVs listed, an ADV part 1 and part 2, which is also known as the brochure. The ADV is the same for every advisor, but Part 2 is different and not as a consistent format. This post discusses what to look for in an ADV for a financial advisor and where to look for it.

When you initially go to brokercheck.com, it will ask you if you would like to search by firm or by an individual.  

Brokercheck

I recommend searching for both the firm and individual.  If you are working with a local Registered Investment Advisor (RIA) the firm information will tell you a lot.  If your financial advisor works for a large firm, like Morgan Stanley or Merrill Lynch, the firm information will be mainly useless.  

Once you search for the firm, it will show two different ADVs, Part 1 and the brochure.  

ADVs.png

This article will help you navigate the two ADVs and the information needed to vet out a potential advisor.  

All examples in this article are from Zhang Financial and the founder of Zhang Financial, Charles Zhang.  Zhang is one of the largest investment managers in Michigan.

Fees

Search Amazon.com and you will find prices and reviews clearly displayed for any product you can possibly imagine. So why is this so difficult with financial advisors? Most financial advisors don’t even include fees on their website and the ones that do typically hide it somewhere. I guess the thought is that advisors are nervous about turning off prospective clients before even the initial meeting. First, if a prospective advisor doesn’t have their fees clearly written on the website, this is probably not a firm that you should be considering in the first place. If a firm is hiding their fees, what else are they hiding? Still, if you want to see the exact fees a financial advisor is charging, a glance at the ADV should do the trick.  Fees are located in the ADV form 2.

Fees.pngSource:  Brokercheck.com 3.25.18

I would consider this fee schedule to be pretty bad.  Yes, it lays out the maximum that you may pay, 1.2% on Assets Under Management,  but doesn’t mention who pays this fee. For example, does everyone pay 1.2% unless you have over $10 million invested?  The fee structure should be very clear and this is not clear at all what I may be charged if I become a client of Zhang Financial.  

Number of Clients and Advisors

A question I don’t get nearly enough is, “How many clients do you work with?”  The answer to this question will tell you just how much planning and service a financial planner can provide. If you are expecting great service and comprehensive planning, you should expect the advisor you are working with to have less than 100 clients. Good luck doing a financial plan and expecting prompt returns on phone calls if your advisor is working with another 200 or 300 other people.

You can locate the number of employees and clients your financial advisor has in ADV part 1.

Employees.png

Clients.png

Source:  Brokercheck.com 3.25.18

Zhang financial has 29 employees servicing 836 clients, and 12 of those employees appear to be advisors that work directly with investments.  I would consider this to be a pretty respectable advisor to client ratio of 70. This means that the average advisor works with 70 clients, which is fairly low.

Disclosures

Wouldn’t it be nice to know if your financial advisor has had any formal complaints? I mean if your advisor has ripped someone off in the past, this would be beneficial for you to know, and luckily this is all laid out in the ADV. The disclosures section of the ADV explains complaints made against the advisor, if the complaint was settled, and how much in dollars was the award to the client.

To find the disclosures section go to the ADV and look for the disclosures section. As of March 25, 2018, Zhang Financial was reporting no disclosures, which means that neither the company nor an advisor working for Zhang, has had a formal complaint or legal discipline.  However, if you search by individual, not firm, you will find the owner of Zhang Financial, Charles Zhang, does have a few disclosures before starting Zhang Financial. This is one of the reasons that it is important to check both the firm and individual in BrokerCheck.  

Assets Under Management (AUM)

The AUM section tells us two very important things. AUM tells us how much money the advisor is currently managing, and if the advisor is a broker or fee-only financial planner. If this section is blank, this typically means that the advisor is a broker and sells a product. For example, if you sell an annuity and earn a commission from the annuity, this section would remain blank. If a value is displayed here, it means that the advisor is charging a fee based on how much assets he is currently managing. There are two parts here, discretionary and non-discretionary assets. Discretionary means the advisor has full authority to place trades on the clients account. Non-discretionary would be assets in which the client may advise or give suggestions, but does not have authority to place trades on the behalf of a client.

AUM is located on the ADV part 1, under Regulatory Assets Under Management,

AUM.png

Source:  Brokercheck.com 3.25.18

As I mentioned previously, Zhang Financial is one of the largest Michigan Registered Investment Advisors, with roughly $2.8 billion in AUM.  Be cautious if this number is very small or even zero. If it is $0, this is probably because the advisor is a broker. Brokers sell investment products, like annuities or loaded mutual funds, and therefore aren’t considered to have AUM.   

Experience

Now, I am not in the camp which believes that you should only work with advisors that also was successfully managing money during the grim Great Depression in the 1930s, but some experience in this business is necessary. If your financial advisor was working at the Arby’s drive through three months ago, you may want to make alternate plans. The ADV includes a resume of your advisor, including prior employment and years in the financial industry. As a reminder, there is very little entry requirements for new advisors, do your due diligence here.

In order to find past experience of a financial advisor, you will need to search for an individual and not a firm on brokercheck.com.  

Registration

Source:  Brokercheck.com 3.25.18

Charles Zhang, the founder of Zhang Financial, has been in the investment management business since 2006.

BrokerCheck.com is one of the most helpful resources available when researching prospective financial advisors.  When you hire a financial planner, it must be based on more than just a hunch when you meet with him or her. Brokercheck.com will give you the background that you need to make an informed decision regarding a potential financial advisor.  

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