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Securities Division

Investor Information - Choosing Advisers

 

A recent survey conducted by The NASDAQ Stock Market indicates that stock ownership among the general public has doubled in the past seven years (43% of American adults). The demographics of investors have changed dramatically. A majority of investors (55%) are under the age of fifty and one-half are not college graduates. Most working-age investors describe themselves as blue or white collar workers (35%) rather than manager/professionals (29%). Ten percent are homemakers.

 

Americans are realizing that they hold the key and bear the responsibility for their own financial futures. Relying on government or an employer probably won't suffice in the future. As consumers, we constantly face changes in the economy which can create confusion in our financial lives. Inflation, constantly changing tax laws, the increasing volatility of investments, and other factors beyond our control can disrupt plans and budgets. Growing concerns are prompting many people to seek the help of a financial professional. Questions arise as to how you identify a competent investment adviser who can assist you.

 

The selection of any professional can be done best by following a step-by step search process. You should select a investment adviser by checking his credentials, experience, reputation, and qualifications. Then, identify your primary needs in seeking financial advice in order to evaluate each investment adviser you meet, based on his ability to help fulfill those needs. You should select an investment adviser who can provide the services you need, based on your financial situation and goals. Remember, you are paying this person to help you shape your financial future. It is your responsibility and right to fully investigate the investment adviser's background, methods of practice, and credentials. The term investment adviser indicates a specialized focus on investment planning. Usually, investment advisers must be registered with the Securities and Exchange Commission (SEC) or your state's Securities Division.

 

Call your state's Securities Division to determine whether your investment adviser is required to be registered.

 

A financial planner can be an agent, broker-dealer, investment adviser, investment adviser representative, or someone else who prepares a financial plan that might include securities, but not necessarily. If a financial planner gives advice regarding securities, that person is typically considered to be acting as an investment adviser, as well. Check your state's securities laws for the definition of investment adviser.

 

Definition of Investment Adviser:

 

Pursuant to the Tennessee Securities Act of 1980 [T.C.A. 48-2-102(10)], investment adviser means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, buying, or selling securities, or who for compensation and as a part of a regular business issues or promulgates analyses or reports concerning securities.

Investment adviser does not include:
(A) A bank (unless it is acting as an investment adviser for a registered investment company), savings institution, or trust company;
(B) A lawyer, accountant, engineer, or teacher whose performance of investment advisory services is solely incidental to the practice of such lawyer's, accountant's, engineer's, or teacher's profession;
(C) A broker-dealer whose performance of investment advisory services is solely incidental to the conduct of such person's business as a broker-dealer and who receives no special compensation for such services;
(D) A publisher of any bona fide newspaper, news magazine, or business or financial publication of general, regular, and paid circulation;
(E) A person who has no place of business in this state if:
(i) The person's only clients in this state are other investment advisers, broker-dealers, or institutional investors; or
(ii) During any period of twelve (12) consecutive months, the person does not direct business communications into this state in any manner to more than five (5) clients (other than those specified in subdivision (10)(E)(i)), whether or not such person or any of the persons to whom the communications are directed are then present in this state; or
(F) Such other persons not within the intent of this subdivision (10) as the commissioner may by rule exempt from this definition as not in the public interest and necessary for the protection of investors.

 

Definition of Investment Adviser Representative:

 

Pursuant to the Tennessee Securities Act of 1980 [T.C.A. 48-2-102(11)], investment adviser representative means any partner, officer, or director of (or person occupying a similar status or performing similar functions) an investment adviser, or other individual, except clerical or ministerial personnel, who is employed by or associated with an investment adviser and does any of the following:

(A) Makes any recommendation or otherwise renders advice regarding securities;
(B) Manages accounts or portfolios of clients;
(C) Determines which recommendation or advice regarding securities should be given;
(D) Solicits, offers or negotiates for sale of or sells investment advisory services; or
(E) Supervises employees who perform any such actions;

Investment adviser representative does not include such other persons not within the intent of this subdivision (11) as the commissioner may, by rule, exempt from this definition as not in the public interest and necessary for the protection of investors.

 

General Considerations:

  • Before hiring an investment adviser, here are some tips to follow: Decide what you want from an investment adviser. Are you looking for investment or estate-planning advice, saving for retirement, or financing a child's college education? Defining your goals will make it easier to find an adviser who meets your needs.
  • Ask persons you trust for recommendations. Your accountant, lawyer, or banker might be able to help.
  • Interview several investment advisers before making a decision. Most won't charge for the initial consultations.
  • When you interview an investment adviser, bring a list of questions and write down the investment adviser's answers. If you have problems or disagreements later, you'll have a record of what was said.
  • Check the background of the investment adviser and/or investment adviser representative with your state's Securities Division or the SEC for any disciplinary problems. Don't hesitate to contact references provided by the investment adviser.
  • Once you've selected an investment adviser, request a written contract or letter that outlines the services you expect and the investment adviser's commissions or fees.
  • Monitor your investments by reviewing your monthly statements and making sure your money is going where the investment adviser says it is going. That's the best defense against fraud.

Basic questions to ask before you sign anything include:

  • How are you compensated? Do you get a commission for recommending specific products? If you charge a fee for services, how is the fee calculated? Is there a cap on fees
  • Does the investment adviser or any member of the firm act as a general partner or receive compensation from investments you recommend?
  • What is your educational background? How long have you been in the business? What did you do before you became an investment adviser?
  • What are your special areas of expertise?Will you provide me with a list of clients I can call for references?
  • Are you a Certified Financial Planner? Do you belong to any professional organizations?
  • Have you ever been disciplined by the Securities and Exchange Commission (SEC) or any other regulatory organization like the National Association of Securities Dealers (NASD)?
  • Are you registered as an investment adviser with the SEC or any states? If you are registered with the SEC, in which states have you submitted notice filings?
  • Who will handle my account? Will it be handled by an individual or a team?
  • Where will my funds or securities be held?
  • Will you provide a written analysis of my finances and your recommendations
  • Do you work with other professionals, such as lawyers, accountants, broker-dealers, broker-dealer agents, and/or insurance agents? Do you pay them referral fees?
  • Once we have a plan, how often will we review its progress? How often will we meet?

Smart investors will ask a lot of questions and learn as much as they can before they act. Remember, in dealing with an investment adviser you will be revealing a great deal about yourself and your financial status, so it is important to exercise great care in selecting someone qualified to meet your needs. Additional investor education information is available through your state's securities agency or at http://www.nasaa.org/ or 1-888-84NASAA.

 

How to Select an Investment Adviser

  1. Review your personal finances.
  2. Determine your financial goals.
  3. Know the risks you are willing to take.
  4. Interview a number of investment advisers and/or financial planner
    1. Meet each investment adviser and/or financial planner in his office and ask the following questions:
    2. What is the investment adviser's and/or financial planner's education and training background?
    3. How much experience does he have?
      What is his area of expertise?
    4. Does he have a track record that you can examine?
    5. How is the investment adviser and/or financial planner compensated?
  5. After the meeting evaluate:
    1. Did the investment adviser and/or financial planner give clear and complete answers to your questions?
    2. Did the investment adviser and/or financial planner explain any terms that you did not understand?
    3. Did you feel comfortable with the investment adviser and/or financial planner?
    4. Did you leave the meeting confident that you understood the topics of discussion?

If you answer "no" to any of these questions, move on to the next candidate.



Conduct a background check by:

  1. Calling the Tennessee Securities Division at 615-741-2947 or 800-863-9117. They can tell you when the investment adviser or their representatives were registered in Tennessee and whether the investment adviser and/or investment adviser representative have been the subject of any regulatory actions. Financial planners are not regulated by the Division.

Contacting the SEC's Investment Adviser Public Disclosure website and the SEC's Office of Investor Education and Assistance. You will be leaving the State of Tennessee's Website.