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.
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.”
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 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.