How to avoid planner rip-offs and find a trustworthy adviser

You’re not immune from financial-adviser misconduct or outright fraud even by sticking with big-name firms. Late in 2005, American Express Financial Advisors (now Ameriprise Financial) paid more than $58 million to settle charges that it promoted mutual funds from which it received kickbacks, allowed some clients to do illegal market timing, and sold out-of-state 529 college-savings plans without explaining the negative tax consequences. In fall 2005, the National Association of Securities Dealers (NASD) began investigating whether Merrill Lynch & Co. call-center employees dumped less-wealthy clients (those with less than $100,000) into unsuitable investments to boost profits.

Overall, an estimated 16 percent of registered investment advisory firms reported pending and past disciplinary proceedings in 2005, says the Investment Adviser Association, a trade group. Those complaints range from violating professional standards to breaking the law. What’s worse, unlike bona fide financial planners, some brokers who call themselves advisers may not have to reveal conflicts of interest thanks to a recent Securities and Exchange Commission (SEC) ruling (See our February 2006 Have you heard? report). But here are things you can do to reduce the odds of running into adviser scams and incompetence:

Demand minimum requirements. Look for financial advisers with at least five years’ experience and one or more professional designations. And make sure the planner is fee only, meaning that he or she doesn’t work on commission. A Certified Financial Planner (CFP) is the industry’s general practitioner. For complicated tax situations, consider a certified public accountant with a personal financial specialist (PFS) designation. (Go to www.aicpa.org to find a PFS.) Details on more than 50 titles are at www.nasd.com. To find a fee-only CFP, go to www.napfa.org or www.cfpboard.org.

Ask for state registrations. Companies and sole practitioners paid to dispense investment advice must register with the SEC if they manage assets of $25 million or more. In most states, advisers who manage less must register, too. Go to the North American Securities Administrators Association’s Web site (www.nasaa.org) for listings of state regulatory agencies. When we vetted the planners for our story we found it surprisingly easy to contact people in the state offices willing to help us find adviser information.

Get Form ADV. All registered advisers must file this with the SEC. Part I discloses formal investment-related public disciplinary proceedings and legal judgments going back 10 years. You can find it at www.adviserinfo.sec.gov. (It’s easier to get if you have the adviser’s Central Registration Depository or Investment Adviser Registration Depository number.) Item 8 gives you conflicts of interest, and Item 11 lists disciplinary actions. Request Part II from the adviser; it outlines services, compensation, and potential conflicts of interest.

Access the Central Registration Depository. This database lists an adviser’s disciplinary record and work history. Request information through your state regulator, or get it at the NASD Web site, at www.nasdr.com/2001.asp.