Weeding out less-than-savory participants from any industry advances its practitioners as members of a real profession.

In a new alert, the Securities and Exchange Commission is enlisting the help of investors in the weeding process by directing them to check each advisors’ background and look for red flags—whether they’re considering hiring a new advisor or have been working with him or her for years.

Unregistered “advisors” continue to be a huge problem for the industry and regulators and should cause any investor to immediately pump the breaks on an engagement, the SEC said in the alert, published yesterday.

SEC tools for checking an advisor’s background are readily available and straightforward. “You can find details about an investment professional’s qualifications through the search tool on Investor.gov, the SEC’s website for individual investors. Also, make sure to ask SALI (SEC Action Look Up) whether your investment professional has been named in an SEC action.  If you need help, you can call our toll-free investor assistance line at (800) 732-0330 for help,” the SEC alert said.

One dangerous unregistered advisor, Gaylen Rust of Layton, Utah, was charged by the SEC and other regulators last year for successfully persuading hundreds of investors nationwide to invest more than $200 million in a nonexistent silver trading pool. 

Rust was a longtime businessman in Layton, Utah, where he ran a coin shop started by his father in 1966. He also founded a charity called Legacy Music Alliance that funded arts programs in schools. A profile in The Salt Lake Tribune called Rust "the state's biggest proponent of arts education."

While non-registration with a regulator should be an absolute deal breaker for investors, registration should not be an all-clear. Investors should still do a deep dive into their advisors’ enforcement background to see if they have been subject to any kind of investigation, censure, fine, penalty or worse, the SEC said.

You just never know what you’ll find when you dig into an advisor’s enforcement history. One Harvard research team recently found that one out of every 14 advisors registered with FINRA had records of serious misconduct such as fraud, forgery or unauthorized trading. Thirty percent of that group had multiple offenses, according to Mark Egan, a professor at Harvard Business School and a co-author of the study.

Advisors who have engaged in the misconduct in the past are five times as likely to engage in misconduct again in the future, Egan said.

Other red flags that should create investor alarm? Outsized performance claims and promises and investment statements that the advisor creates him or herself are all hallmarks of advisory swindles.

Rust, the unregistered advisor who swindled investors out of more than $220 million, told his victims his bogus Ponzi scheme averaged 20% to 25% annually and never less than 12%.

“Watch out for guaranteed high returns,” the SEC said in the alert. “Promises of high returns with little or no risk are classic warning signs of fraud.  Every investment carries some degree of risk, and the potential for greater returns usually means greater risk.  Ignore so-called “can’t miss” and “guaranteed risk-free” investment opportunities –even if they involve HoweyCoins [the enticing imaginary bitcoin investment the SEC created as a cautionary investor tool]!  Better yet, report them to the SEC.

Rust’s firm also didn't provide investors with third-party investment performance statements, such as those that are sent by advisory or brokerage firms on bona fide accounts. Instead, Rust created spreadsheets showing purported transactions himself and sent them to investors.

The SEC also used the alert to caution investors against the costs of active trading and high fees.

“Know how to be a better investor,” the SEC said. “Did you know that active trading and some other very common investing behaviors actually can undermine investment performance?  According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state, or company, and holding on to losing investments too long and selling winning investments too soon.”

The agency also wants investors to focus on the impact fees have on their investment performance. “It can be costly to ignore fees associated with buying, owning, and selling an investment product.  Expenses vary from product to product, and even small differences in costs can mean large differences in earnings over time.  An investment with high costs must perform better than a low-cost investment to generate the same return.

With the heightened interest and trading in initial coin offerings and agency enforcement against unregistered ICOs, the SEC directed investors to check on the registration of any securities

“Any offer or sale of securities must be either registered with the SEC or exempt from registration.  Otherwise, it is illegal.  This has taken heightened importance with the advent of initial coin offerings as many of these offerings may involve securities.

“Registration is important because it provides investors access to key information about the company’s management, products, services, and finances.  Always check whether an offering is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330,” the alert said.