Is it important to check the professional history of my investment advisor?

By Investopedia Staff AAA

Absolutely! Just as finding a good mechanic will help keep your car running smoothly, finding a good broker or financial advisor can help keep your portfolio in good shape. On the flip side, just as a bad mechanic can wreck your car, a bad brokerage firm, investment advisor, or broker can make your portfolio perform even worse than what's reasonably expected. For this reason, it's crucial that you do your homework on your broker as well as your investments.

Unlike investments, for which past performance may not necessarily be a good indicator of future performance, a broker and brokerage can be judged by their past records of performance. And the quality of brokers' and firms' past performance does not depend on their profitability, but on how they treated their past customers, how many and what types of grievances against them were filed with the SEC and NASD, and how these grievances were resolved. All of this information can be found for free on the NASD website under its regulation toolbar or on the Investment Advisor Public Disclosure website, created by the SEC. If you can't find enough information from these two sources, you can also contact your state regulator, who will have other sources of helpful documentation.

Although a broker's poor track record may not automatically mean poor service, there is always the possibility that he or she will repeat the same actions, so be careful. Conversely, when you come across companies or individuals that have resolved issues in a fair and professional manner or don't have many complaints against them, chances are good that these professionals are trustworthy.

However, just as there are things a mechanic can't control, some factors affecting your portfolio are out of the hands of your brokerage firm, investment advisor or broker. If you buy a car with a bad track record, either because you didn't do your research or you wanted to take your chances, a mechanic can only do so much to keep it running. The same goes for your portfolio: if you fill it with stocks whose quality you didn't evaluate, a broker or brokerage firm will be able to do only so much to help you.


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