Pay special attention to Item 5 and Item 11, says Peggy Cabaniss, CFP, president of HC Financial Advisors in Lafayette, California, and past national board chairwoman of the National Association of Personal Financial Advisors, or NAPFA. Item 5 gives information on the business itself; Item 11 will tell you if any of the firm's advisers have had problems with state or federal regulators or have been charged with or convicted of a felony in the past 10 years.
If you look up your Certified Financial Planner and find he's had to acknowledge charges, felonies or violations, "you have to have a conversation with the adviser to get an explanation," Cabaniss says. "And you should proceed cautiously."
The size of the financial planning firm affects where you'll find Form ADV Part I. Thanks to the Dodd-Frank financial reform law, if your financial planner or his firm manages at least $110 million in assets, the company is required to register with the SEC with limited exceptions (those with $100 million or less must register with state regulators). You can find forms filled out by SEC-registered firms and many state-registered firms in the commission's searchable database.
Part II of Form ADV is even more detailed and comes from the adviser himself. Advisers are required to furnish you with Part II before you sign on as a client, and annually afterward.
This form will provide details on the educational background and experience of all the decision-makers at the firm along with a fee schedule and information on how the firm bills clients. It will reveal any partnership or reciprocal agreements with other businesses as well as any possible conflicts of interest, says Cabaniss.
You can get the form in person from the adviser, or search at the SEC's Investment Adviser Public Disclosure site.
Is your CFP also a broker dealer?
Many Certified Financial Planners are also broker dealers, says Tobie Stanger, senior editor for Consumer Reports. If yours is one, you'll have access to even more background information.
Get details on the broker and brokerage, including qualifications, credentials, previous employers going back 10 years and disciplinary actions through the Washington D.C.-based Financial Industry Regulatory Authority, or FINRA, the self-regulatory agency for the securities industry.
There can sometimes be a "lag time" between any actions and postings, says Stanger.
So check back from time to time as information is updated.