Finding Red Flags in Your Adviser's Record

by Laura Rowley

An exclusive analysis conducted for Yahoo! Finance shows one in 10 financial advisers in the U.S. have been involved in at least one customer dispute. Such disputes typically involve alleged unsuitable recommendations, misrepresentation of a product or transaction, or unauthorized activity, such as making trades in an account without a client's approval. Granted, these transgressions may not constitute fraud, but they can surely cost investors their hard-earned money.

The question is: How do you know your adviser is not among this group?

BrightScope, a firm that rates corporate 401(k) plans, this week launched BrightScope Advisor Pages in an effort to facilitate comparison among registered investment advisers (RIAs) and broker-dealers. The service aims to give consumers free, in-depth profiles of 450,000 financial advisers, with more to be added in the coming months. The site aggregates public information from the Securities and Exchange Commission (SEC) and the private non-profit Financial Industry Regulatory Authority (FINRA). (RIAs are regulated by the SEC or a state securities regulator; broker-dealers must be registered with the SEC and be members of FINRA.)

"The database is searchable from every dimension you want, and truly public in that Google will be indexing it," says Mike Alfred, BrightScope co-founder CEO. "Up until now, if you search an adviser's name on Google you would never find the SEC or FINRA data directly, because the format makes the data impossible to scrape." (Spokespeople for the SEC and FINRA declined comment.)

BrightScope hasn't populated all of the profiles on the site yet, but it will eventually include advisers' qualifications, experience and employment history, type of clients, total assets under management, average account size and area of specialty. BrightScope will also add information about legal disputes, formal complaints, bankruptcies and terminations. The firm will make money by giving advisers the ability to add their own information to their profiles for a fee.

The heightened transparency is likely to make some financial advisers uncomfortable, and provide a higher profile for practitioners with clean records. At the same time, consumers would be wise to use the site as a starting point and double check their findings against the detailed reports available through the SEC's Investment Adviser Public Disclosure (IAPD) site and FINRA's BrokerCheck database.

BrightScope conducted an analysis exclusively for Yahoo! Finance of 328 financial advisory firms with at least 50 advisers. The data revealed that at 14 of those firms, one-quarter or more of advisers were involved with at least one dispute. (The analysis, which is not included on the website, is based on disclosure filings as of Dec. 31, 2010.)

"Some firms have a higher tolerance for long regulatory rap sheets, provided [the advisers] bring lots of assets with them," says Ryan Alfred, BrightScope co-founder and president (Mike and Ryan Alfred are brothers). "Other firms say, 'there's no way we'll work with this person.'"

But some advisers argue that dispute records are more nuanced than a rap sheet. David Alan Boyer, CEO of Capital Guardian Wealth Management in Belmont, N.C., says he likes the idea of more transparency, but investors need to dig into the results. Some 22 percent of his firm's brokers have at least one dispute on record, but the firm itself has never had a claim filed against it.

"You can have a frivolous $10,000 claim against an adviser, but it's not like going to court and proving your innocence and it goes away," Boyer says. "It goes to arbitration, he proves his innocence, and it stays on his record. But if you see a pattern, you have a problem."

Marshall Leeds, CEO of Summit Financial Group of Boca Raton, agrees. At Summit, 38 percent of advisers were involved in at least one dispute, according to the SEC/FINRA data as of Dec. 31, 2010. "It all depends on how long the adviser has been in business, what type of products they do and what the complaints are," he noted. "If a firm has 10 advisers and has been in business 20 years and has 20 complaints, that's one-quarter of a complaint a year. You have to go to BrokerCheck and know the information you are getting is right."

Ryan Alfred conceded that some advisers have more exposure to complaints. "We agree that if you're in business long enough, you will get these issues," he says. "The question is: Are they chronic, and was there fraud involved?"

In addition, some dispute numbers may be skewed by repeat offenders. Wedbush Securities of Los Angeles, for example, has had 274 customer disputes among one-quarter of its 445 advisers who were on staff as of Dec. 31, 2010, according to SEC and FINRA data analyzed by BrightScope. But 51 of those disputes involve Bambi Iris Holzer, an author and popular media pundit. (FINRA's BrokerCheck describes the disputes against Holzer in more detail.)

Steve Goldberg, Holzer's attorney, says the disputes stem from a variable annuity product that she sold as a UBS broker in the mid-1990s. The product was marketed by Golden Select, which was later purchased by ING. "At some point there was ambiguity in the terms and ING interpreted the guarantee differently than Golden Select," he says. "She called clients and told them. The vast majority of disputes were against UBS. FINRA data...identify her as the individual broker, but that doesn't mean she was sued; she was the salesperson."

But there are five pending disputes for more recent product sales by Holzer, according to BrokerCheck. Jeffrey Kaplan, an attorney for several investors involved in the recent disputes, says they relate to two high-commission investments Holzer sold: Provident and Shale Royalties, an oil and gas private placement that turned out to be a Ponzi scheme; and Highland Floating Rate Advantage Fund, a junk bond fund that lost more than half its value. A Wedbush spokesperson says Holzer left the company in late March.

"Brokers are obligated to know what they are selling and to perform the actual due diligence on it," says Kaplan. "In the interest of caution, why would an investor choose a broker like that when there are thousands of brokers who have never had a customer complaint filed against them?"

In fact, some 25 firms in the analysis of 328 had no disputes at all. One example is Atlanta-based Ronald Blue & Co., a 30-year-old, fee-only firm that has 134 advisers and $5 billion under management. The company's SEC filings show that planners generally recommend low-cost index funds or exchange-traded funds. "We just look for quality people and are choosy about who we hire, and that's always been important to us," says spokesperson Malissa Light.

Laura is author of the book "Money & Happiness" and blog of the same name. Read more about her here.


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