Picking a Financial Planner Who Isn’t a Quack

There are times when government regulations--if not adequately enforced--are counterproductive. Such may be the case with financial planners and other investment advisers.

That’s the conclusion of the General Accounting Office, the watchdog arm of Congress. It concluded in a report issued last week that regulations requiring investment advisers to register with the Securities and Exchange Commission and submit to periodic review are not well serving the investing public.

That is because the SEC is poorly staffed and, thus, does not adequately review registered advisers, whose numbers have more than tripled over the past decade to about 14,000 people managing about $4.6 trillion in assets, the GAO said. (Thousands more people who call themselves financial planners are unregistered.)

And even when advisers are reviewed, often only inadequate disclosure or record-keeping problems are uncovered, the GAO said. The SEC does little to ensure that deficiencies are corrected, the report said.

Accordingly, unscrupulous advisers can still run amok, fleecing investors out of hundreds of millions of dollars every year, according to some estimates. Current law “may be doing more harm than good” by lulling investors into a false sense of security that SEC-registered advisers “have a ‘seal of approval,’ ” the GAO concluded.

The agency noted that one unidentified investor who lost her life savings of $60,000 said she had been “impressed” that her adviser was registered with the SEC.

Several efforts are under way to boost regulation of financial planners and other advisers. Rep. Rick Boucher (D-Va.) has submitted a bill, generally backed by state regulators and the financial planning industry, that would require anyone offering investment advice--including financial planners--to pay to register with the SEC and provide clients with full disclosure of their qualifications. The bill also would give customers the right to sue for damages when they lose money because of law violations.

The SEC also supports tightened registration requirements, SEC Commissioner Mary L. Schapiro told a House panel last week. The commission wants to use registration fees to help pay for enforcement, she said. Previously, the agency supported enhanced adviser oversight through a self-regulatory organization such as the National Assn. of Securities Dealers.

Even if regulation and oversight is toughened, the ultimate responsibility for scrutinizing advisers is yours, not the government’s. The SEC, Congress and other watchdogs can only do so much; you must take steps on your own to be sure you’re not ripped off.

Here are some key pointers to help you in that effort:

* Don’t get a false sense of security. Just because a planner is registered doesn’t mean he or she is honest and competent. To register under the federal Investment Adviser Act, all you have to do is pay $150 to the SEC, fill out a short form and wait 45 days for it to be processed. No professional standards must be met, or tests passed, to secure SEC registration.

Actually, anyone can call himself a financial planner, whether registered or not. Indeed, someone once enrolled a dog as a member of a financial planning organization.

“Far too many folks are calling themselves financial planners; the public has no assurance that the person they are dealing with is regulated in any way,” says Dale E. Brown, director of government affairs at the International Assn. of Financial Planners in Atlanta.

* Know the types of planners and their potential conflicts of interest.

There are three types. Some planners receive commissions for their services, much as stockbrokers do. But be aware that they may try to sell you certain products not because those products are best for you, but because they earn the highest commission.

Another type, fee-only planners, generally receive an annual fee or an hourly fee--usually between $50 and $200. The third type receive both fees and commissions.

* Use referrals. Ask friends or relatives for references. Ask one or more of the organizations that accredit financial planners for lists of planners in your area who meet their standards.

One of these is the International Assn. of Financial Planners in Atlanta, (404) 395-1605. It provides a booklet listing planners who have met its most rigid standards. The association also provides a free booklet, “Consumer’s Guide to Financial Independence,” available by calling the association or writing it at: 2 Concourse Plaza, Suite 800, Atlanta, Ga. 30328.

Another is the Institute of Certified Financial Planners in Denver, (800) 282-PLAN. It will refer you to up to five certified financial planners in your area, and give you biographical information on them, along with their fee structure and work experience. It also offers a free booklet, “First Steps to Financial Security: A Guide for Selecting a Certified Financial Planner,” which you can get by writing the institute at: 10065 E. Harvard Ave., Suite 320, Denver, Colo. 80231.

* Interview more than one planner. And ask probing questions.

The Council of Better Business Bureaus, in its booklet “Tips on Financial Planners,” suggests the following questions to ask planners before selecting one:

What is your professional background? How long have you been a financial planner? How long have you been in the community? Will you provide references from three or more clients you have counseled for at least two years? Will I be dealing with you or an associate? May I see examples of plans and monitoring reports that you have drawn up for other investors? What financial planning trade organizations do you belong to?

You can obtain the council’s booklet by sending $1 and a self-addressed, stamped business envelope to: Council of Better Business Bureaus, 4200 Wilson Blvd., Suite 800, Arlington, Va. 22203.

* Recognize the “red flags” of financial planning fraud.

The Council of Better Business Bureaus suggests avoiding advisers who urge you to put money in anything with a “guaranteed” rate of return well above prevailing market rates. Such investments often entail much higher risk--or are simply fraudulent. They might be so-called Ponzi schemes--sham investments in which the promoter uses money from some investors to pay “profits” to others.

Also, the council suggests, avoid planners who give you no investment alternatives. They could be trying to steer you into a fraudulent scheme or they may be more interested in making a fat commission than in serving your best interests.

And be wary of planners without a staff. Those working without an office or permanent address may be fly-by-night operators. Try to visit the planner’s office; make sure he or she has ties with other professionals, such as lawyers and accountants. That’s because few planners have the expertise and credentials to provide all the investment services you’ll need.