Under federal law dating back to 1940, investment advisors are required to act in their clients’ best interests…so most of us assume that these advisors provide at least as much or even greater transparency than stockbrokers. And in most cases, that is true.

But: In the regulatory documents available to most consumers, financial advisors are asked to disclose criminal charges, regulatory actions and even accusations from regulatory entities. Problem: They are not required to disclose conflicts of interest, arbitration claims, lawsuits or customer complaints. By looking at the documents, you’d never know that an advisor has been sued for unscrupulous behavior, for example, as long as that lawsuit resulted in no criminal or regulatory action.

Getting accurate information about an advisor’s background is challenging, says Dana Anspach of the investment advisory firm Sensible Money. Here’s what to look for and where…

Form ADV brochure: You can start here. Advisors are required to complete this standardized 20-to-30-page form to “disclose any legal or disciplinary events that are material” to clients’ assessment of the business and its management. But herein lies the rub: If the advisor deems certain information immaterial, it won’t appear on the form. This form is available from the advisor or at
AdviserInfo.SEC.gov.

Customer Relationship Summary: The CRS contains similar information to what’s in the Form ADV brochure, cut down to two or three pages. Advisors must post the CRS to their websites. A “yes” to the question of whether they or their financial professionals have legal or disciplinary histories must be accompanied by details or a link to a source where details can be found. But: The disclosure requirements are the same as with the ADV brochure. That means you’ll get a little more detail on criminal and regulatory actions, but you still won’t learn about complaints, lawsuits or arbitration. The form is available at Investor.gov/CRS.

Investment Advisor Disclosure: The US Securities and Exchange Commission’s Investment Advisor Disclosure site allows you to search by individual or firm at AdviserInfo.SEC.gov. Again, while the site is great for information about regulatory activity, you won’t find arbitration, customer complaints or lawsuits here.

BrokerCheck: If your advisor is also designated a broker-dealer, regulatory actions against him/her will appear on the Financial Industry Regulatory Authority’s BrokerCheck website at BrokerCheck.FINRA.org. Search by the advisor’s or business’s name. Generally speaking, arbitrations are not made public. The vast majority of cases are heard by the American Arbitration Association or by a private company called JAMS. But a handful are resolved through FINRA, which requires those arbitrations be made public. So if the advisor had an arbitration resolved through FINRA, it will appear on BrokerCheck.

State regulatory bodies: Disciplinary actions taken at the state level appear here. Find your state’s regulator at NASAA.org.

Google: Since advisors aren’t required to disclose so much of what you’d like to know, try some basic web searches to see if disgruntled former clients turn up. You can try “[Advisor name] vs.” or “[company name] vs.” to see if any lawsuits show up in Google.

Finally…ask questions. With so much off the disclosure table, sit down with a prospective advisor and simply ask for an exhaustive list of lawsuits, arbitration claims and customer complaints. Just be aware that a bad egg still might not tell you the truth…and an advisor who is with a larger company may not even have information about anything beyond his/her piece of the business.

Interview the advisor. Does it feel like you’re talking with a salesperson or an educator? Good advisors focus not on product but on process and see their job as educating you. Test this by asking him/her to explain a financial concept. If he slings a lot of jargon and hype your way, he may not be your best pick.

And beware—when consumers get burned, they’ve almost always been told something that’s too good to be true. 

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