Although the financial industry is not the most trusted by Americans, it’s important for investors to check the background of their advisors.
According to new research from the University of Minnesota’s Carlson School of Management and University of Chicago’s Booth School of Business, more than 7 percent of financial advisors have a history of misconduct. This indicates “relatively widespread” problems that range from placing clients in unsuitable investments to fraud.
Researchers found that even though this is troubling, it often doesn’t mean that bad apples are being weeded out. Even if an advisor is fired for financial misconduct, they may find work at a different firm. Researchers found that advisors who have engaged in misconduct will likely continue to engage in the same shady behavior.
“What surprised me was that this industry is highly competitive, and there are many firms and this information can be very easily accessed,” stated Gregor Matvos (an associate professor of finance at The University of Chicago). “Despite this fact, advisors with poor records are still employed by the largest firms in the sector. This was one of the most surprising things.
However, advisors who have a history of misconduct can see their careers go down. After an incident, they often find work at a lower-paying job at a less well-respected firm. Researchers found that advisors with similar issues are often hired by firms with staff. This suggests that there is a “matching”, or a “matching”, between advisors and firms.
Which firms are included in this category? Researchers culled information from FINRA’s BrokerCheck database on all financial advisors working in the U.S. between 2005 and 2015. They named names and cited the firms with the highest percentage of advisors with past misconduct (see the table below).
Oppenheimer & Co. is the top-ranked advisor, with at least one misconduct case in their files, they discovered. Oppenheimer stated that it made significant investments to address compliance risks and issues in its private client division, such as hiring compliance professionals, upgrading its systems and appointing new senior leadership.
“Oppenheimer understood the need to address legacy issues head-on, and we are confident we have put in place safeguards that ensure our advisors and all employees meet the highest ethical standards,” said the company.
Matvos stated that investors shouldn’t rely on advisors to be clean and honest. Instead, they should visit FINRA’s BrokerCheck site for information about their advisor. He said that some investors might not know about this resource. Advisors may also be able to help you with this.
Advisors with a history of misconduct often live in areas that are more suited to a certain type of person: elderly, wealthy and less knowledgeable about financial matters. California and Florida have some counties with high numbers of “bad apples”, with California’s Monterey and Palm Beach having 18.4 and 18.1 percent respectively of advisors with past misconduct.
Matvos stated that misconduct is more common in areas with older people. Imagine you’re a surgeon. Although you may have made a lot, it does not mean that you spent a lot on building a portfolio.
The median settlement for misconduct amounts to $40,000, which suggests that these advisors can cause serious harm to families, according the researchers. Research suggests that investors who work with advisors with past misconduct may be putting their nest eggs at stake.
Matvos stated that people with previous misconduct are more likely than others to commit misconduct. Matvos stated that once they have done it before, they are more likely do it again. This is true in every service industry. There are both good and bad plumbers. How does the industry handle these poor eggs? Are they able to continue providing services or do they go away? Many of them seem to stay around.”
