Financial Advisors Need to Vet Their Broker-Dealers

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For independent financial advisors, it’s good advice to keep up-to-date on the health, wealth and reputation of their broker-dealer.

According to Scott Smith, associate director at Cerulli Associates, a research firm specializing in asset management and distribution trends, financial advisors need to make sure to properly vet their broker-dealer, just as the client might do. Whether you’re an FA about to jump ship or you’re simply worried about where you are now, it’s wise to look into the finances, history and culture of your broker-dealer.

In an interview with eFinancialCareers, Smith noted that FINRA is a good place to start to find out about arbitration and legal actions.

Red flags

While almost every broker-dealer has some sort of arbitration or legal action in their past, significant amounts (depending on the size of the firm) and the repetition of the actions might send off a red flag. At the end of the day, a firm needs extra capital to not only cover trades, but also to make sure they can pay for any settled action.

Often, the word on the street from others in your field will make it pretty clear if the broker-dealer you’re thinking about working for is a respected, financial stable and established player. The broker-dealer’s culture is also a big consideration, says Smith. The firm should offer what’s important to the financial advisor. “Some people like independence, and others want the broker-dealer to handle every fundamental aspect of the business,” he notes. “The culture and the product mix have to match your business model.”

Technology is the conduit to everything

Smith suggests that FAs look into how the broker-dealer’s commitment to technology can be customized to fit the practice of the advisor. “Technology is the conduit to everything, whether it be trading, compliance or efficiency of their practice,” he adds. For instance, a managed accounts program platform has to make it simple for an FA to run their books.

Whatever the angle of the business, the broker-dealer needs to be willing to have an open and honest discussion with an FA before they come on board. That discussion should also deal with due diligence, especially involving such risky things as private placements.