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Some Firms Are More Tolerant of Bad Brokers

January 11, 2018

An upcoming study reveals that when it comes to hiring brokers with patchy records, wealth management firms vary widely in their tolerance for previous misconduct, Michael Blanding of Harvard Business School Working Knowledge writes in Forbes.

Across the board, 7.3% of U.S.-based financial advisors have a mark on their records, Blanding writes, citing a forthcoming study co-authored by Mark Egan of Harvard Business School, Gregor Matvos of Booth Business School at the University of Chicago and Amit Seru of Stanford Graduate School of Business as a followup up to their 2016 working paper.

Among the most lenient firms are Oppenheimer & Co., where 20% of advisors have a history of misconduct, First Allied Securities, with 18%, and Wells Fargo, with 15%, according to the study cited by Blanding. Towards the bottom of the spectrum is USAA Financial Advisors — the practice serving military families, where just 3% of brokers had marks on their records, the study found.

But the authors’ analysis included all advisors at each firm and not just the ones working with clients, so the prevalence of bad apples among client-facing brokers could be even higher, Egan tells Blanding.

The team, which analyzed Finra records, also found that the extent of misconduct is substantial: the average settlement is over $100,000 while the median is $40,000, Egan tells Blanding. And around 30% of brokers with past infractions were also repeat offenders, the study found.

Meanwhile, only about half of brokers punished for misconduct were fired, and of those, half were hired by another company within a year, according to the study.

But there may be a reason why some firms have higher rates of brokers with misconduct history. Brokers who got in trouble tended to move from companies with lower rates of bad brokers to those with higher rates, the authors found.

“It seems like there is some sorting going on, with some firms more tolerant of misconduct than others,” Egan tells Blanding.

By Alex Padalka
  • To read the Forbes article cited in this story, click here.