Beware of your financial adviser

How widespread is misconduct within the financial advice industry?


By Harold Pollack

Economists Mark Egan, Gregor Matvos, Amit Seru released a sobering working paper last week that explores this question. These authors conduct an ingenious analysis of a unique BrokerCheck dataset that covers 644,277 currently-registered financial advisors in the United States, and an additional 638,528 who have left the industry between 2005 and 2015.

Their paper documents disturbing patterns involving some of the nation’s most prominent names in retail financial services.

More than 7 percent of registered advisors have been disciplined for misconduct or fraud. Many such cases involved placing clients into unsuitable or overly-risky investments. Misrepresentation and omission of key facts were other large categories. The misconduct was also financially significant. In cases involving settlements, the median was $40,000. Many cases involved products such as variable annuities, which are notorious for their complexities and hidden fees.

Perhaps the most surprising finding is the high proportion of repeat offenders still present in the industry. Among advisors with documented misconduct, 38 percent were repeat offenders. Those who commit misconduct and remain in the financial advice industry were five times more likely than their peers to commit subsequent misconduct. Just in the year immediately following a documented misconduct case, perpetrators exhibited an 11 percent probability of another documented case, compared with a rate of just 0.6 percent within the overall industry.

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