One in 13 financial advisers and stockbrokers have engaged in some form of misconduct during their career, making them five times more likely to offend again than those with a clean record, according to a new study.
While nearly half of offenders are terminated, 44 percent are able to find work in the industry within a year, and tend to move to firms with a higher-than-average concentration of misbehavers. As a result, nearly three-fourths of them remain working in the industry the year following their offense.
Those trust-rattling statistics come from a study that sifts through more than 1.2 million publicly available records on the BrokerCheck database for the Financial Industry Regulatory Authority (FINRA) from 2005 to 2015.
The study, “The Market for Financial Adviser Misconduct,” was written by Mark Egan, a professor at the University of Minnesota’s Carlson School of Management and colleagues Gregor Matvos and Amit Seru from the University of Chicago’s Booth School of Management and published by the National Bureau of Economic Research this spring.
Citing other research that finds broker misconduct more common in counties with higher proportions of elderly and the less educated, Egan and colleagues suggest that “firms that specialize in misconduct with several unscrupulous financial advisers are likely targeting vulnerable consumers … with low levels of financial sophistication.”
The top 10 concentrations of misbehavior are found in Florida, California, Puerto Rico and New York. According to the study, the rate of broker misconduct is 6.03 percent in Hennepin County and 6.60 percent in Ramsey County, while Stearns County has the seventh-lowest incidence of broker and adviser misconduct at 3.26 percent, compared with a U.S. average of 7.28 percent.
Fallout is still roiling the financial industry. Massachusetts, according to industry reports, is “looking into hiring policies and procedures” at firms with an above-average concentration of misbehaving brokers. FINRA is looking to make it easier for consumers to identify firms with a high concentration of misbehaving advisers through its BrokerCheck website — but not anytime soon.
Egan said that even with its current limitations, FINRA’s BrokerCheck website (www.finra.org) is the best defense against individual broker misbehavior. “It’s the easiest thing a consumer can do.”
Egan and colleagues count six categories of incidents as misconduct. These include settlement of regulatory, civil and criminal complaints, employment termination after a complaint and brokers’ personal financial bankruptcy. They do not count disputes still pending, nor do they count personal financial liens. One-quarter of disputes are for recommending “inappropriate” investments, and one-third are for misrepresentation or omission of key facts, the researchers found.
The study has drawn fire, as well. The Securities Industry and Financial Markets Association (SIFMA) has called the study a “flawed report” that “suggests an anti-industry bias.” It argues that some reported incidents should not be counted as misconduct, such as when a broker is involved in a criminal or civil action unrelated to client contact. In addition, many settlements of disputes, the trade group argues, do not indicate misconduct but are reached “in order to save time and money, to reduce risks and exposure, and to ensure finality.”
Egan disputes that explanation, calculating the industry pays nearly half a billion dollars per year in settlements, with the median levy totaling $40,000, based on FINRA data, a number he cites as too high to be merely to settle “nuisance claims.”
Reactions varied as well from the three firms identified as having the highest rates of misconduct.
Oppenheimer & Co. (19.6 percent), described “legacy issues” that it tackled head on, including “changes in senior leadership, branch managers and significant changes in our adviser ranks.”
First Allied Securities (17.7 percent) acknowledged that it had “not undertaken a detailed review” of the study but nevertheless questioned its reliability, claiming it included “trivial, administrative matters” in its definition of misconduct.
Wells Fargo Financial Advisers Network (15.3 percent) is made up of independent advisers who use Wells Fargo as their platform for trades and clearing. While not Wells Fargo employees, they are under Wells Fargo’s compliance oversight. Spokesman Tony Mattera said the study “has some serious flaws,” including comparing retail firms against wholesale and investment banking firms where brokers have relatively little direct client contact. In addition, Mattera said its own data contradict the study’s assertion that brokers with past misconduct are five times more likely to engage in future misconduct.
“[W]e hold our advisers to a very high standard for professionalism and personal behavior,” he said.
Brad Allen is a freelance journalist and former investor relations executive for companies including Imation Corp. and Cray Research. His e-mail is firstname.lastname@example.org.