Data & Research March 8, 2016

Many Advisers With Misconduct Records Are Reemployed

Researchers created a 15-year database of advisers from FINRA’s BrokerCheck.
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Creating a database of the disciplinary records of 1.2 million financial advisers from FINRA’s BrokerCheck database between 2005 and 2015, researchers found that in that period, 7% of advisers had misconduct records, and 50% of those with a misconduct record were fired.

Although this information is publicly available, unsophisticated retail investors do not know it exists, which could be why 44% of advisers with misconduct records are rehired within a year, and one-third of those with misconduct records are repeat offenders.

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These are the main findings of the report, “The Market for Financial Adviser Misconduct,” authored by Gregor Matvos and Amit Seru of the University of Chicago Booth School of Business and Mark Egan of the University of Minnesota Carlson School of Management. The database collected all consumer disputes, disciplinary events and financial matters from advisers’ disclosure statements during the 15-year period. The disciplinary events include civil, criminal and regulatory actions.

Advisers with misconduct records who find another job in the industry do not do so without cost, according to the researchers. They tend to move to less reputable firms, with a 10% reduction in compensation averaging $15,000. Additionally, according to the researchers, “firms that hired these advisers also have higher rates of prior misconduct themselves.”

While many firms have stellar records and “use their reputation to attract sophisticated consumers,” some firms purposely engage in misconduct and purposely “cater to” unsophisticated consumers, according to the paper. The researchers also found that “misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations and high incomes.”

The researchers conclude that “the large presence of repeat offenders suggests that consumers could avoid a substantial amount of misconduct by avoiding advisers with misconduct records. Furthermore, this result implies that neither market forces nor regulators fully prevent such advisers from providing services in the future.”

The researchers say that the FINRA BrokerCheck should act as a market mechanism to “prevent and punish misconduct,” but since it does not, regulators should promote the FINRA BrokerCheck website to create “an increase in market transparency.”

The researchers contend that this is the first large-scale study to document the extent of misconduct among advisers. “The Market for Financial Adviser Misconduct” can be downloaded here.

Data & Research March 8, 2016

Confronting Health Care Cost Fears With Hard Data

Sometimes it just takes a little insight to dispel a lot of fear and uncertainty—especially when it comes to financial planning and the future cost of health care. 
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The 2016 Guide to Retirement from JP Morgan Asset Management provides a range of insights about what financial challenges individuals should expect in retirement, including hard figures on Medicare premiums, long-term care costs and other critical aspects of retiree health care.

Reading the guide will be a troubling experience for anyone not already versed in the retirement challenges faced by workers in the United States, notes JP Morgan Asset Management Global Head of Retirement Solutions Anne Lester. “A lot of the numbers we cover are going to be discouraging for a lot of people to read,” she says.

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For example, a 65-year old in 2016 should now expect to pay upwards of $4,660 per year on health care, and that’s just at the median. This includes $400 for vision, dental and hearing care; $1,900 on Medicare “Medigap” Plan F; between $900 and $4,000 on Medicare Part D premiums and prescription out-of-pocket costs; and another $1,460 in Medicare Part B coverage.

“And these are just the predictable costs,” Lester warns. “There will be additional premiums per person for families with modified adjusted gross income above approximately the $85,000 threshold. And then there are the true uncertainties of things like health care inflation, Medicare solvency issues, long-term care needs, etc.”

Chief Retirement Strategist Katherine Roy predicts that, should current demographic and pricing trends hold, health care costs will inflate by upwards of 6% or 7% per year through the 2020s and 2030s. “Projecting the current numbers forward, that would mean the individual turning 65 today would be paying $18,000 per year for health care by age 85.”

NEXT:  Where’s the good news? 

Perhaps most troubling in the updated Guide to Retirement report, Roy points out that the likelihood of at least one member of a married couple turning 65 today requiring professional long-term care is “now alarmingly high.” For women, a whopping 73% will require such care at some point in their lifetime, while just 35% of men will require long-term care from a non-family professional. 

“This is yet another important outcome of women’s increased longevity over men. They live longer and are far more likely to die alone than their male spouses, so this must be planned for,” Roy warns.   

One piece of good news is that long-term care is not always as expensive as one might fear, and there is an emerging ecosystem of tools and advice to help individuals confront these vexing questions. According to the JP Morgan research, there is a one in three chance that a long-term care need will last less than six months, and just a one in 10 chance it will last five or more years. Further, many families are able to pull together and provide some aspects of long-term care directly for their loved ones, but this is often a strain both financially and practically.

“In the end, many people realize nursing home care or in-home care is going to be expensive, but they should also know there is significant cost variation depending on where and how care is utilized—so smart consumers and planners can protect themselves and their families,” Roy says. “Nursing home care, especially, varies a great deal state-by-state, and between urban and non-urban settings. These are all things to think about well in advance of retirement.”

Lester concludes that investment-based tools such as health savings accounts (HSAs) will have to play a big role in helping people confront these incredible cost projections. “The next step for us at JP Morgan is to get really empirical and dive deeply into the real spending patterns of our clients as they enter retirement and start paying for all these things from accumulated assets. We will be looking for insights to help those people who still have a long time to plan, and those people already facing these challenges.”  

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