As promised, I'm devoting the next few segments of my commentary to talk about those disastrous interactions with brokers and financial advisors. It’s far too common that people lose money from bad investments, bad advice, or even worse, outright fraud and theft.

Most people engage a financial advisor when faced with a large life event – after inheritance, a legal settlement, or at retirement. Usually, it's when large sums of money are involved. But before any investments are discussed you should check the background of anyone you're thinking of dealing with.

There are two basic types of financial advisors. Registered Investment Advisors typically help people for a fee and often maintain custody of customer’s cash and securities. Oversight is provided by the SEC and individual states. There are roughly 275,000 RIAs practicing today

Far more common are Registered Representatives, otherwise known as brokers. There are about 663,000 registered reps working for insurance companies, independent broker-dealers, and large wire houses like Merrill Lynch.  FINRA is a self-regulatory organization that oversees all brokerage activity. They license representatives, track continuing education, and audit and monitor activities of all firms and their registered reps.  If needed, they discipline or suspend representatives and arbitrate disputes between clients and their advisors.

After you determine if you're dealing with a broker or RIA, you should then perform a background check. FINRA makes this very easy if you're dealing with a broker. All you have to do is Google FINRA Brokercheck.  With the correct spelling of your prospective broker’s name, you can select a detailed report that will give their entire employment history and a listing of all their nonbusiness related activities. Most important is a section entitled disclosure events. This lists all complaints, litigation, arbitrations, and regulatory infractions.

FINRA Brokercheck is one of the most important things you can do to protect yourself. Look at these disclosure events very carefully.  This is where the old adage “where there's smoke, there's fire” rings true.  While even the best planners can have an occasional complaint, very few have multiple infractions. In the last five years, about 3.3% of all brokers received a single complaint.  But less than a quarter of one percent had three or more complaints filed against them, and in that group you’ll find the overwhelming majority of bad eggs.

Step one of staying out of trouble is to know who you’re dealing with. Tomorrow I'll discuss what you should do if you really have been harmed by your advisor.