By many accounts, one of the biggest problems the industry has faced since the global financial crisis of 2008 is one of trust. Tomes have been written about how the too-big-to-fail banks, hocking mortgage-backed securities, whittled away the trust of investors and the public. Yet as the industry slowly rebuilds this trust, there may be cause for alarm in the chair right next to you. New research has revealed just how endemic brokers with severe misconduct violations may be throughout the country and the industry.
’The Market for Financial Adviser Misconduct,’ forthcoming in the Journal of Political Economy and coauthored by Amit Seru, professor at Stanford Graduate School of Business; Gregor Matvos, professor at the McCombs School of Business at the University of Texas; and Mark Egan, assistant professor at Harvard Business School, reveals misbehaved FAs are spread nationwide. Among the counties with the highest concentrations of marked FAs are Madison, N.Y.; Indian River, Fla; and Monterey, Calif., data reveals.
On average one in 10 advisors has serious misconduct records – and that’s a conservative number, Seru says. The study uses specific Finra misconduct disclosures, including unsuitability, misrepresentation, unauthorized activity, omission of key facts, fee related issues, fraud, fiduciary duty issues, negligence, risky investments, and churning, among others, Seru says. These specific disclosures, says Seru, were chosen because in the researchers’ minds they represent instances of dishonest behavior.
Dissolute FAs might be spread across the country, but they often seem to be concentrated in certain firms. In these firms, Seru says FAs can “hide” and serve “unsophisticated” clients who may be unaware of Finra’s BrokerCheck. This phenomenon is particularly evident with repeat offender advisors.
Commenting on the data, a spokesperson for Oppenheimer & Co. reiterates to FA-IQ that the study used data from the period 2005-2015.
"Since 2015, Oppenheimer has made significant investments to proactively tackle risk and compliance issues in our private client division. We've made changes in senior leadership, branch managers and significant changes in our advisor ranks," the spokesperson says. "In addition, we have appointed a new global compliance officer, added a significant number of new professionals to our compliance and audit teams, enhanced internal systems, and implemented external systems to significantly improve surveillance capabilities. Oppenheimer recognized the need to address these legacy issues head-on, and we are confident that we have put in place safeguards to ensure that our advisors and other employees meet the highest ethical standards."
A Wells Fargo spokesperson says the firm has examined the study carefully and reviewed its own data to assess the study’s assumptions.
"We are confident that the processes we use to assess, recruit and supervise experienced financial advisors are thorough," says the spokesperson, who insists that a number of the study’s conclusions appear to be flawed as they relate to Wells Fargo Advisors Financial Network.
"We believe their model overstates the level of relevant misconduct, including allegations related to declines in value due to volatility or infractions completely unrelated to the advisors’ professional responsibilities," the spokesperson says. "The trust our clients place in our advisors and our company means everything to us. Wells Fargo Advisors adheres to strict policies and procedures designed to put our clients at the center of all that we do.”
A spokesperson for First Allied points out to FA-IQ that while the study refers to "employee misconduct," First Allied’s advisors are not employees but rather are independent contractors affiliated with First Allied. Therefore, while it is accurate to say First Allied advisors, it’s not correct to say the advisors are employees.
“We have not had the chance to undertake a detailed review of the study to verify the accuracy of its data, methodologies or conclusions, so it would be inappropriate to comment," says the First Allied spokesperson. "With that said, we expect every First Allied advisor to adhere to the highest professional and ethical standards. Beyond this, and as a matter of policy, we do not publicly discuss regulatory or legal matters.”