A Sweeping Report Demonstrates the Extent of Broker Misconduct

By Andy Goldwasser

Partner

A working paper by business school professors at the University of Chicago and the University of Minnesota found that 7% of financial advisors have been disciplined for misconduct.[1] Misconduct ranges from making unauthorized trades in a client account to unsuitable investments. The number was even higher for some of the most respected firms.  Nearly 20 percent of financial advisors at Oppenheimer &Co. have misconduct records. The misconduct rate for advisors at Wells Fargo Adviser FN totaled 15.3%, UBS Financial Services 15.14% and 13.74% for Raymond James. According to the study, “misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations, and high incomes.” These figures are concerning to say the least.

The study homed in on six of 23 categories in the BrokerCheck database overseen by the Financial Industry Regulatory Authority, or FINRA. FINRA is the financial sector’s self-regulatory organization. It maintains a detailed, searchable and publicly available database called BrokerCheck. The BrokerCheck database details “disclosures,” which include investment-related arbitration or civil suits that resulted in an arbitration award or civil judgment for the customer, as well as bankruptcy filings and formal proceedings by regulators for violations of investment-related rules among other infractions.

The numbers in the study are astounding. Even though half of advisers found to have committed misconduct are fired, 44% of advisers who leave a job due to misconduct are hired by another firm within a year. According to the study, “prior offenders are five times as likely to engage in new misconduct as the average financial adviser.”

So be aware. The analytics don’t lie.  Before hiring an adviser, go to http://brokercheck.finra.org/ and check for disclosures.

[1] The Market for Financial Adviser Misconduct, Stigler Center for the Study of the Economy and the State, University of Chicago Booth School of Business, Mark Egan, Gregor Matvos, Amit Seru, A Working Paper, February 2016.