The financial marketplace can be risky. You’ve probably heard about investors being swindled by shady, boiler room stock brokers. This can happen. But the Financial Industry Regulatory Authority (FINRA) works to protect investors and preserve market integrity by holding brokers to a high ethical standard. Being a financial industry watchdog is essential to the meaning of FINRA.
What Does FINRA Stand for?
The FINRA definition of success is a fair financial marketplace. FINRA literally stands for the "Financial Industry Regulatory Authority." In terms of their mission, they stand for:
- Investors getting basic protection
- The security product fitting investors’ needs
- Truth and clarity in security product advertising
- Complete disclosure of investment products
What Does FINRA Do?
To help prevent fraud and shady practices, FINRA has the power to set the rules that define ethical and professional behavior for brokers and investment firms. Some of the laws relate to accurate reporting and SEC compliance. FINRA uses state-of-the-art technology to oversee over 600,000 brokers countrywide. It monitors 37 billion transactions per day. Plus, member firms must report their activities to FINRA on a regular basis.
FINRA rule breakers can face a fine, suspension or termination from the industry. This nonprofit organization records and posts all punitive actions on its website. These records can be useful in your search for a financial advisor. So far, FINRA has submitted more than 800 fraud cases over to the SEC. Fraud victims have received 27.9 million in restitution through FINRA actions.
Other important FINRA responsibilities involve creating transparency in the financial marketplace and educating investors. To sell securities, brokers and dealers must register with FINRA to get a license. The applicants must take an exam, submit to fingerprinting, pass a background check and participate in continuing education programs. Brokers who fail to register with FINRA can suffer fines, legal action or closure of their firms.
FINRA vs. SEC
The Securities and Exchange Commission (SEC) and FINRA are the most powerful regulating entities in the U.S. financial sector. Both exist to maintain the integrity of this industry. But, their capabilities and roles are very different.
The SEC is responsible for protecting investors and policing all the securities markets. It is a U.S. government agency with the legal authority to investigate possible violations of security laws. It can take administrative or civil legal action against alleged violators.
FINRA is a nongovernment, self-regulating organization (SRO). Its primary role is to oversee U.S. stockbrokers and brokerage firms. FINRA members must agree to follow the organization’s rules and regulations. FINRA has the power to discipline members who violate its rules and regulations. Basically, FINRA handles all licensing and regulation of broker-dealers.
How to Use FINRA
The FINRA website is an excellent resource for validating the credentials of your financial advisor prospects. You can discover whether they have FINRA membership, proper licensing, SEC violations or disciplinary actions against them. On the website, FINRA has free search tools to help you use its database to make more informed financial decisions concerning financial professionals and securities firms.
FINRA uses its resources to educate investors who visit its website. You can read articles on how to spot investment fraud. It provides tools that help you compare the cost of various funds and weigh investment risk levels. You can get additional help by calling FINRA at 800-289-9999.
Using FINRA to Find a Financial Advisor
Getting help with your investments can be confusing. Many people have trouble determining the difference between financial advisors and financial planners. Generally, financial planners help clients with long-term goals. Financial advisors actually manage their clients’ accounts and investments. To qualify for this task, financial advisors must hold a series of licenses administered by FINRA.
Financial planners don’t have regulators. But some certified financial planners® (CFP®) hold licenses that allow them to handle portfolio and investment management. So, if you have CFP® candidates who want to manage your stock portfolio, check their licensing with the CFP Board’s search tool.
- Whether the person or firm hold the proper licenses to sell securities, give investing guidance or both
- A summary of the broker’s employment history, regulatory citations, complaints, arbitrations and licensing information
- A thorough list of FINRA-registered financial advisors in your area
- Verification of their central registration depository (CRD) number
CRD is a FINRA database of all registered securities, financial advisors and brokerage firms. Every financial advisor you interview should have a CRD number. You can use CRD to:
- Check to see whether they have a license to practice in your state.
- Make sure their employment information is accurate.
- Find out the number of years they have been investing.
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Questions to Ask Your Financial Advisor
Once you’ve FINRA-checked your financial advisor candidates, you can narrow the field by considering other factors. Ask your candidates whether they are fiduciary. This means they have a legal obligation to act entirely in your financial best interest. Working with a fiduciary can increase your trust level in the advisor’s suggestions. You can verify their fiduciary status through FINRA.
During your question and answer session, ask your potential financial advisor specific questions about:
- Their investment priorities
- The risk/return relationship of their strategy
- Their consideration of your risk tolerance
- The source of their investment choices
Vague answers to your specific questions should trigger caution. Investment professionals should rely on proven investment strategies tailored to your financial needs. They should be able to tell you whether they have an aggressive or conservative investment strategy. Also, they should be clear about their compensation. Their motivation could be tied to whether they receive a commission or salary.
Don’t shy away from asking them about their other clients. Try to determine their client turnover rate. Equally important, consider the advisor’s personality. Do you feel comfortable with entrusting your financial health to this person? Does this advisor appear flexible and realistic? The person managing your finances should have the ability to be candid and transparent with you.
For added safety, find out whether your potential financial advisor works for a brokerage firm that is a Securities Investor Protection Corporation (SIPC) member. If a SIPC-member brokerage fails, the SIPC protects your securities up to $500,000. But, it does not cover your loss due to market downturns. The key is to be comfortable with your decision.
Frequently Asked Questions
What do you need FINRA for?
FINRA is a regulatory organization that oversees brokerage firms and their representatives in the US. It ensures investor protection, market integrity, and enforces compliance with industry rules. FINRA also provides education and licensing exams for individuals in the securities industry, contributing to fair and transparent financial markets.
What is the 2 year rule for FINRA?
The 2 year rule for FINRA requires individuals associated with a member firm to wait two years before taking on certain roles in the securities industry. This rule aims to protect investors and maintain industry integrity by ensuring individuals have the necessary experience and knowledge.
What is the FINRA 5% rule?
The FINRA 5% rule refers to a regulation set by the Financial Industry Regulatory Authority (FINRA) that limits the amount of equity interest an individual or entity can hold in a member firm to no more than 5%. This rule aims to prevent any single individual or entity from having excessive control or influence over a member firm, thereby promoting fair and transparent practices within the financial industry.