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.

First « 1 2 » Next