Capital Ideas Blog

does your financial adviser specialize in misconduct

By Natasha Gural-Maiello

From: Blog

Financial advisers are often perceived as dishonest, and consistently rank among the least trustworthy professionals. New research suggests this public perception may be deserved.

In the first large-scale study documenting the economy-wide extent of misconduct among financial advisers and financial advisory firms in the United States, researchers find that most financial advisers who engage in misconduct get to keep their jobs—or are quickly rehired by another firm in the industry.

Some of the largest financial advisory firms in the US have the highest rates of misconduct, according to University of Minnesota’s Mark Egan and Chicago Booth’s Gregor Matvos and Amit Seru. At Oppenheimer, 20 percent of advisers have been disciplined for misconduct, the researchers find. At First Allied Securities, 18 percent; at Wells Fargo Advisors FN, 15 percent; and at UBS Financial Services, 15 percent. Morgan Stanley and Goldman Sachs are among the firms with the lowest rates of misconduct, with rates at both closer to 1 percent.

“We find evidence suggesting that some firms specialize in misconduct,” the researchers write. “Such firms are more tolerant of misconduct, hiring advisers with unscrupulous records. These firms also hire advisers who engage in misconduct to a lesser degree.”



And firms that hire advisers who have left or lost jobs because of misconduct appear to have a culture of it. “This ‘match on misconduct’ reemployment undermines the disciplining mechanism in the industry, lessening the punishment,” the researchers write.

Financial advice is big business in the US: 56 percent of all American households seek advice from a financial professional, according to the Survey of Consumer Finances, issued by the US Federal Reserve in cooperation with the Treasury Department.

To research the industry, Egan, Matvos, and Seru used data from the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that oversees 650,000 licensed salespeople. Most of these salespeople are officially known as registered representatives, though they use a variety of other titles, including adviser and broker. These salespeople help to manage more than $30 trillion of investible assets, according to the researchers.

FINRA runs a public database, BrokerCheck, which investors can use to research representatives and firms. The researchers used the FINRA data to build their own database, including in it the 1.2 million financial advisers registered in the US from 2005 to 2015. The researchers’ database represents about 10 percent of people employed in the finance and insurance sectors.

The data reveal that more than 12 percent of active financial advisers’ records have a disclosure, which can indicate any sort of dispute or disciplinary action, alleged or established. Approximately 7 percent of active advisers have been disciplined for misconduct or fraud. Of the advisers who have engaged in misconduct, 38 percent are repeat offenders. “This simple summary statistic strongly suggests that misconduct does not arise due to bad luck or random complaints by dissatisfied customers,” write Egan, Matvos, and Seru.

More than half of misbehaving advisers stay with the same firm after a year, according to the data. Of those who leave, 44 percent quickly (within a year) find new jobs in the industry.

The research indicates that misconduct is widespread in regions with relatively high incomes, low education levels, and elderly populations. Some firms rife with misconduct are likely targeting vulnerable consumers, say the researchers, while other firms use their reputation to attract sophisticated consumers.

Some consolation for investors: even accounting for reemployment, advisers who engage in misconduct are more likely to leave the industry or have longer periods of unemployment. When they find new jobs, they tend to take pay cuts of 10 percent, and land at companies considered less desirable places to work.

Financial advisers’ misconduct records are public information, which should help to prevent and punish misconduct. But according to the research, neither market forces nor regulators are successfully preventing crooked advisers from continuing to provide their services.


Mark Egan, Gregor Matvos, and Amit Seru, “The Market for Financial Adviser Misconduct,” Working paper, February 2016.


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