Academic Study Reports Widespread Financial Adviser Misconduct
A recent academic study of FINRA-registered financial advisers reports that 7% of broker-advisers have misconduct records and a larger percentage of such brokers work at certain firms targeting retail customers with older, wealthier consumers. The study analyzed the universe of FINRA-registered financial advisers from 2005-2015 (currently over 650,000 brokers) and found the following: (i) roughly 7% have misconduct records and some large firms employ more than 15% bad brokers; (ii) prior offenders are 5 times more likely to engage in misconduct; (iii) 44% of brokers fired for misconduct are re-employed within a year; (iv) firms with a higher rate of misconduct are more likely to hire fired brokers; and (v) misconduct is concentrated at firms with retail customers and in counties with low education, elderly populations, and high incomes. The authors explain: “We find that financial adviser misconduct is broader than a few heavily publicized scandals.” The authors conclude: “Our findings suggest that a natural policy response to lowering misconduct is an increase in market transparency and in policies targeting unsophisticated consumers.” The authors also note that financial advisers are “often perceived as dishonest and consistently rank among the least trustworthy professionals.”
OUR TAKE: This study will help supporters of imposing a fiduciary standard on all retail financial advisers. It also suggests that the financial industry needs to clean up its act and stop complaining about regulation.