The more we hear from you the more conversations we have; the better we can do our job.
So, thank you for facilitating that and
with that I'll jump into the topic that
I'm going to talk about, which is choosing a financial professional. And
to be clear,  I have four things that I want to talk about, when you choose a financial professional.
First and most important thing,
for a person choosing a financial investor a professional is to ask,
"Is that person registered." Are they registered with the SEC?
Or are they registered with the state?
If they are not a registered financial professional with the SEC or the state,
the risks you are taking and dealing with them, go up dramatically.
They don't have
oversight. They don't have inspection. They don't have
many of the things that we do—and the people we work with that the SEC do—day in and day out.
I'm not saying there's not, there aren't good investments,
that are
offered by people who are not registered. What I am saying is, it's much, much, much harder to find them.
And if you're looking to get ripped off, it's much, much easier to find that.
The second thing I want to say is,
you need to ask, what type of
investment professional you're dealing with?
This, people talk about a broker-dealer versus an investment advisor. There are two,
significant distinctions between them.
One is the scope of the relationship.
A broker-dealer relationship is a transaction-based relationship. An investment advisor
relationship is a
portfolio-based relationship. Those are like
economic terms
so let me try and say what it means in real words. A broker dealer, is someone you go to and you say,
"I'm thinking about buying telecom stocks,"
"I'm thinking about a mutual fund that invests in foreign stocks."
"Can you recommend something to me?"
An investment advisor is someone you go to and you say, "I'm 52 years old,
I have a job, I have a
401k,
my kids are going off to college, I'd like to save some additional money for my retirement."
"Help me work through that in light of my needs and my portfolio." So that's the scope of the relationship.
Another key aspect relationship. How are they paid?
A broker-dealer is
principally paid by a commission. What does that mean?
When you engage in that transaction, when they sell you the stock, or sell you the mutual fund,
they charge a fee to do that.
There may be some other compensation. I'll come back to that.
An investment advisor
generally charges you a quarterly or annual fee based on
the level of assets that they're managing for you or that you manage with them.
So one is a commission, a fee based on the size of the transaction.
And the other is kind of a flat fee that goes on.
Which one is right for you?
Depends on your activity level and what you want from that person.
importantly, understanding the fees,
understanding how they're compensated, helps you understand their incentives.
I believe that when you understand someone's incentives,
you have a much better relationship with them. How are, in short, how are you making money?
Now I talked about the principle ways people make money. There are other ways that both broker dealers and investment advisors make money.
One of the things we're trying to do at the Commission, is making sure that an ordinary retail investor—who's not
twenty five years
and you know—can understand those fees upfront. If they can't be presented clearly,
they're probably too complex for
a retail investor.
Okay
Next thing, is the person you're dealing with a person who has some bad history?
Have they done something wrong in the past?
That's a good indication that they might do something wrong in the future. It's not perfect, people change
sometimes, but, you'd like to know. It's information you'd like to know.
My recommendation is that you don't engage with the person unless you know, whether they have any bad history. This is an area where
we've made strides
together with our friends at FINRA and the states.
But we can do better and we're working on making our databases of
prior bad actions more available to people in an accessible way.
It's a is a wonderful power of the Internet.
It used to be that if somebody had engaged in the bad act,
it was in a file somewhere at a courthouse at the SEC and your ability to get at it?
Forget it. Now, you can know that and by the way,
I think that deters people from acting improperly in the first place.
Last thing and perhaps the most complicated thing, but
it's a question you should ask when you're engaging with an investment professional—of any type.
And, if they can't explain this to you, you need to think twice.
How much of my money that I'm giving you, is actually going to work for me?
So when I give you my two hundred dollars a month, when I give you my
five hundred dollars a month,
how much that money is actually going into an
Investment that's going to make a return for me? Is it four hundred and ninety five dollars? Is it,
four hundred and fifty dollars? That's a big
amount off the top. Or is it, you know, very close to $500?
You should know that and they should be able to explain it to you.
I don't think anything that I've said in those four steps, is
very hard for someone who is a professional to be able to explain to you and you should expect it from them.
So, that's my advice
It's also how I would ask you to look at an investment advisor. We have tools I want to make a plug for them.
www.investor.gov
Many more questions that you can ask your perspective broker dealer or investment advisor.
Lists of red flags,
high-pressure sales tactics,
"Hey time is running out." Let me tell you something. I've been doing this a long time.
I've never seen a great investment where time was running out.
Okay, let's just, like say, if somebody has one they can, you know,
show to me, I'd be happy to be wrong. But so far,
not so much.
Go to investor.gov. Take a look at it.
Lastly, when we open it up and with my colleagues,
let me know about your experiences. We've had a couple of
town halls where we've talked to people about their good and bad experiences.
Those are informing our efforts to
raise the broker-dealer standard, and most importantly, bring clarity to this space, so that,
let me just say this. The more clarity we have brought to the investment space,
the better off people are. Where we have brought clarity in the past—through fee disclosure in the mutual fund industry—
people know much more what they're getting into, and through
competition, fees have come down.
As we bring clarity to this space, people will know more about what they're getting, and they'll get more for their buck.
