“Economy-Wide Misconduct” among Financial Advisers

A Culture of Acceptance

By Andrew May, a FINRA attorney at May Law in Chicago:

The University of Chicago and the University of Minnesota got together to create a research paper that has a pretty worrying phrase included in the conclusion: “economy-wide misconduct.”

Those words could mean a lot of things, but in the context of this particular research paper they referred to the widespread misconduct in the financial services industry. The study found that an astonishing 7% of all financial advisers had been disciplined in the past on account of misconduct. Their offenses included everything from giving the wrong advice to a vulnerable client to outright trading fraud.

Alarming Numbers

The study analyzed publicly available data published on the Financial Industry Regulatory Authority (FINRA) website and created a database that tracked over 1.2 million advisers between 2005 and 2015. This number represented over 10% of all advisers in the country during the period.

Almost all industries rely on trust between providers and customers, but this is especially true for firms in the financial industry. Trust is the cornerstone on which every single financial transaction and professional service is based. So, to have such a high proportion of advisers under disciplinary action is very worrying indeed.

But the study didn’t stop there. It went on to state that the proportion of advisers being disciplined at big, well-known firms was even higher. Just how high? Well, one out of every 5 of the 2,000 advisers at Oppenheimer & Co. had misconduct on their records. That fact would be nothing short of alarming to anyone who entrusts their hard-earned money to an adviser at that institution.

The study used FINRA’s new BrokerCheck database, which measures misconduct on the basis of over 23 different categories. Some experts suggest these categories don’t go far enough and the number of financial advisers that may have broken the ethical code could be even higher than the study seems to suggest.

A Culture of Acceptance

All of this may have you checking your advisers disciplinary record and who could blame you? The fact that almost half of all employees found to have misconduct on their records were fired because of it may put you at ease, but only until you realize that 44% of those same ex-employees went on to be hired by other firms in the industry that had even high rates of misconduct than their former employers. So much for a stain on their resumes.

The study even showed evidence to support the fact that people were likely to reoffend once they were fired and rehired: “Prior offenders are five times as likely to engage in new misconduct as the average financial adviser,” the study stated. FINRA is under pressure to check this systemic flaw in the financial world that not only allows people to get away with misconduct, but actually lets them work with clients despite their record.

The top five big firms with the highest misconduct rates were Oppenheimer & Co (19.6%), First Allied Securities (17.72%), Wells Fargo Advisers FN (15.30%), UBS Financial Services (15.14%) and Cetara advisers (14.39%).

Putting a Face to the Numbers

One disturbing finding revealed that financial advisers were likely to disregard the risk tolerance of their clients and push them into products they were not well suited for. For example, an adviser was found selling very aggressive growth oriented equity funds to a 75-year-old retiree who wanted to live on the income from his investments.

The real world consequences of this misconduct results in middle-class and working families losing about $17 billion every year due to the conflicts of interest with their advisers. To help solve this issue, the Department of Labor tried to pass a bill that would effectively make advisers fiduciaries.

If passed, the bill would compel advisers to justify their choice of product and explain why the ones that might seem better suited were not selected. This would mean more brokers would be encouraged to act solely in the best interest of their clients and help them to the best of their abilities.

The proposed bill is still making its way through the political system. Experts, however, believe the rule may pass fairly quickly and will be effective in tackling a lot of the current conflicts of interest issues. But many are still surprised that it took so long for such a study to come out despite all adviser data being public and fully disclosed annually.

It’s important to keep in mind that investors aren’t the only victims of such rampant and unchecked misconduct. These numbers reveal that the majority of advisers do not have any stains on their records. But when studies like this one are released, these advisers are implicated by association with an industry that is doing a poor job of policing its own. Advisers who play by the rules should not be cast in the shadow of those who choose to flaunt the rules and ethics others take seriously.

Nevertheless, fraud and misconduct are still issues the global financial industry are learning to understand and combat. Despite reform that has been made since the 2008 financial crisis, it’s clear that the industry still has a long way to go before it can completely win back the trust of the public and people who rely on financial advice from the experts. By Andrew May, a FINRA attorney and founding member of May Law in Chicago.

“It’s too quiet out there.” Read….  Buy Gold & TIPS for Coming Volatility, Inflation: BlackRock

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  34 comments for ““Economy-Wide Misconduct” among Financial Advisers

  1. Sgt Milstar says:

    Why isn’t John Paulson and the CEO of Goldman Sachs in prison for their roles in the housing meltdown? Here is the story for my question:. http://www.reuters.com/article/us-goldmansachs-abacus-factbox-idUSTRE63F5CZ20100416

  2. Petunia says:

    Madoff had an entire network of financial advisors acting as feeders into his ponzi scheme. Most of those guys were idolized on the financial news networks for the good and consistent returns they brought to their customers. None of those guys were punished for losing their clients money, made to pay back the commissions, or admonished for what they did. The system that brought us Madoff is alive and well, still.

    • nick kelly says:

      His main French feeder committed suicide after losing his own fortune and those of his clients. Although not all feeders acted like this many lost their money.

      • Petunia says:

        Another big feeder is now an anchor on Fox News and was given Louis Rukeyser’s old Wall Street Week show. The irony of the mediocre inheriting the top spots is priceless.

        • John Doyle says:

          It really shows up the subtitle of this blog; ‘economy wide mis-conduct’. The biggest and most economy wide damage is being done by mainstream [classical] economists. By promoting so many myths concerning macroeconomics they have skewed the course of the economy. The ‘culture of acceptance’ says the have a train of supporters in politics, big business and the media who are just accepted as knowledgeable. We have seen it with the food industry and the epidemic of obesity, all based on bad science and deliberate misinformation and we equally see it with the ramping up of inequality, the obsession with budget surpluses, and with exports over imports, with so called un-repayable debts and the unsupportable costs of welfare etc, Making free education into a massive financial burden and more!
          There are systems which work in the real world but you barely hear mention of them.
          When Bernie Sanders shows us his program, the cry is it cannot be afforded. This is bullshit of course, but the opponents will not budge from their rampaging ignorance. Sad really, and dangerous for us!!

        • d says:

          Bernie “I only ran as a democrat to get the free publicity” sanders, the communist .

          Will take you to a much worse place, than those you rail against will.

          Current American system badly needs adjusting.

          Not replacing with an untenable, Sanders, Socialist/Communist wealth redistribution, dissaster.

        • John Doyle says:

          You are welcome to your opinion, but you have no supporting evidence.
          Try this;


        • d says:

          You have no supporting evidence that comrade Sanders.

          Wont take America into a Socalist/Communist Disaster.

          You provide nothing to refute the fact that all Communist, Fascists, and Socialist wealth redistribution states, eventual turn into “Mafia States”.

          O bummer has been playing Socialist wealth redistribution and social engineering games for 7 + years. Sanders intends to go all the way, if America is stupid enough to elect him.

          Kiss goodbye to the US $ as a reserve currency should sanders be elected, then Americas financial problems will really start.

          The world is very unhappy with the mess O bummer has made. It wont tolerate such, from 2 Socialist incompetents, in a row.

        • John Doyle says:

          Would help if you read the article. You continue to bleat about Sanders without a skerrick of proof. PS. I’m not sold on him. But he’s less dangerous than the other 3 by far and he does have a good economic platform, probably thanks to Stephanie Kelton.

        • d says:

          His economic platform is completely untenable, as he can not show

          A what it will really cost

          B how he will fund it, beyond the “Tax the rich” Communist mantra.


          Sanders will be the first POTUS in US history, to be a “lame duck” from the second he is sworn in for the first time.

          If sanders is elected, you will see American political deadlock, and obstruction by congress, move to a whole new level. That will make the O bummer years look like a Bipartisan Paradise.

          The only reason Trump would be a bigger liability than sanders, is that sanders has a few manners, and political experience.

        • John Doyle says:

          Aha!! You are one of those ignorant of economics as it exists [not in some mainstream model]. It’s not at all like one imagines. It’s hard to get one’s head around the reality, but few care.

          The federal Government is monetary sovereign. It created the currency from Thin Air, just like the constitution and all laws. It has unlimited power to create currency simply by buying the debt.
          So all Bernie’s desires are simply able to be fulfilled by the Fed crediting the recipients reserve accounts with new money. It does this now and can continue to do so in perpetuity.

          Federal taxes buy ZERO. They buy NOTHING. All that happens with tax is that its sent eventually to be accounted in ledgers in Treasury. It’s never passed on. It has ceased to be money. The money comes from spending by the Fed. That too is accounted in Treasury ledgers. Tax exists for various reasons but to raise revenue is NOT one of them.

          I’ve no idea how he will get Congress to pass his agenda. It depends on the new congress make up. If it doesn’t play ball, it just will show how dysfunction your country has become. Adult free zone.
          I can do better than O’bummer. How about the USA being an Obamanation?

        • d says:

          He was named O bummer before he was elected and his terms as POTUS have been a total Bummer.

          ” it just will show how dysfunction your country has become.”

          Not My country.

        • John Doyle says:

          nor mine either.

    • walter map says:

      “The system that brought us Madoff is alive and well, still.”

      And yet, we are assured that Madoff’s victims have only themselves to blame for failing to do their ‘due diligence’.

  3. Bigfoot says:

    Do we really need another law ?? So, this bill would require advisers to justify their choice of investment product. To what person/entity ? Oh, some government agency? Yeah, they have done such a great job with our monies right.– So, your client is over 55 (pick a number), you should have put her(him) in MYRA, is that what I smell coming? – We’re from the government & we’re here to help?????

    “Nevertheless, fraud & misconduct are still issues the global financial industry are learning to understand & combat.” That statement is both sad, pathetic, & comical at the same time. IMO, the global financial industry is at the root of the industry fraud, deceit, & theft. I could post a boatload of links to all kinds frauds & scandals perpetrated by “the global financial industry”. I won’t bother.

    I do commend the author for at least mentioning the misconduct along with the brokercheck link. At least the uninitiated have a starting point & an awareness of what goes on. But, swim with the sharks, you’re likely to get eaten ! In the old days, there was no internet. Now, there is absolutely no excuse to blindly fork over your money to a person/entity with so much information at your fingertips. If you fail to perform your due diligence, you deserve what you get ! Plus, you always have to remember that there is NO such thing as a sure thing ! Then you have the outright theft of funds like PFG Best or MF Global which is a horse of a different color.

    Please don’t misconstrue this as an indictment of every person in the industry. It’s not meant to be. Like any group, there are good & bad & the bad tend to make the headlines. The bad in the industry seem to be more predominate at the top of the brokerage food chain.

  4. ML says:

    On the premise that most financial products are a con and bad for your wealth – the monetary equivalent of junk food – the way to sell to them is to make the products complicated to understand so that it needs an army of financial advisers – sales agents – to explain to the unsuspectingected why one particular product should be bought rather than another. And when the product doesn’t perform as expected, the state of the market can be blamed.

    Cynic? Moi?

    • Bigfoot says:

      Yeah, complicated just like our legal system or tax system. Ask an acquaintance what they have in their portfolio & I usually get a non answer. I have a —————– fund. Oh, what stocks are in that fund? Then you get the deer in the headlights look as the wolves look on from the brush line licking their chops.

  5. Agnes says:

    This legislation will pass when Vegas goes out of business. No one wants to be told that 4%/annum is the long term average return on capital(less fees). Few understand that making capital productive is hard work and frequently leads to heartbreak and bankruptcy. As Heinlein said : Tanstaafl (there ain’t no such thing as a free lunch).

  6. walter map says:

    “Why isn’t John Paulson and the CEO of Goldman Sachs in prison for their roles in the housing meltdown?”

    Regulatory capture from the top down.

    ‘Do we really need another law ?’


    ‘If you fail to perform your due diligence, you deserve what you get !’

    Apparently one has no right to any reasonable expectation that the guy on the other side of the desk isn’t trying to cheat you.

    “So, this bill would require advisers to justify their choice of investment product.”

    Please explain why they shouldn’t be so required. Take your time. We’ll wait.

    ‘Please don’t misconstrue this as an indictment of every person in the industry.’

    Unfortunately when most of the apples are rotten they spoil the whole barrel.

    ‘I could post a boatload of links to all kinds frauds & scandals perpetrated by “the global financial industry”.’

    An unending litany of frauds and scandals in fact, day in and day out, a loud and persistent background noise, and largely accepted. Or perhaps merely tolerated.

    The evidence of the last forty years clearly shows the industry is systemically corrupt, optimized for maximum moral hazard, highly incentivized to get worse, and in no real danger of meaningful reform.

    The evidence also suggests the coming crash is going to be a doozy. Then we can all sit around and watch pundits and leaders wring their hands and whine about how it couldn’t be prevented.

    Why, when the situation is so clear and alarming, does it remain so stubbornly intractable to change? It’s because those who have power in the world want it to be this way.

    • Bigfoot says:

      Hi Mr. Map,

      “Evidently we need a new law.” I personally don’t need any more damn laws.

      What new law(s) would you like to have, who will enforce those law(s), how will the enforcement of said law(s) be carried out, what will be the penalties for your new law(s), what will these new law(s) entail, & will your new law(s) make you feel like you can now safely invest? Legislated mandatory profitability? Please give us your highly detailed answers.- Take your time, we’ll wait.

      “Apparently one has no right to any reasonable expectation that the guy on the other side of the desk isn’t trying to cheat you.”

      I never said that & somehow you extrapolated that thought from my comment when I said if you don’t perform your due diligence, you deserve what you get. I stand by that statement 100% & it applies to most all things we undertake in life. IF you have done your due diligence & taken the time to educate yourself, a few things will happen. First, you would have the knowledge to see that the guy on the other side of the desk is trying to cheat you if that’s the case, second, you would have educated yourself well enough that you shouldn’t even need that guy or can at least make an educated assessment of the advice being given. So yeah, again, those people that are too lazy to perform due diligence & educate themselves in whatever the undertaking happens to be, do in fact deserve what they get! There is no easy button.

      NotSoSure posted an excellent link above. This industry has always been about separating you from your money, so again, due diligence (self education) is the only thing you have to keep this from happening to you. As I mentioned previously, outright theft of your funds ala PFG Best & MF Global is a horse of a different color.

      me-“So this bill would require advisers to justify their choice of investment product.”

      you-“Please explain why they shouldn’t be so required. Take your time. We’ll wait.”

      Thanks for waiting. Did you read the next sentence/question after the statement you quoted? It’s an important part of the discussion. Please do tell me WHO will be deciding that the
      investment advice given was appropriate or not? Be specific! Take your time. We’ll wait.

      IMO, the only person that the adviser needs to explain strategy to is their customer. If the customer has not taken the time to educate himself (again, due diligence) & the ALLOWS themselves to be blindly led to a product that might not be a good fit, they get what they deserve! There is no easy button & there is NEVER a guarantee you will make money in regards to investing or business regardless of whether you have an honest or dishonest advisor. Personal responsibility is what is needed, not more laws from big brother.

      There are plenty of honest financial advisers out there. That doesn’t mean they are going to make you money. Most can’t even beat an index like the S&P. There are good & bad in every trade & the people that most often get burned are the ones that have not bothered to educate themselves. Do we need a law mandating that plumbers (or any & all service providers) give their customers proper advice? IMO, it’s up to you to understand that you only needed a new pressure switch & not a new submersible pump to make your deep well function again. Of course, those who haven’t taken the time to educate themselves will always be the ones susceptible to being taken by the unscrupulous vendor.

      Maybe you would be happy with a law requiring potential investment customers having to attend a mandatory government sponsored investment class & graduating before they seek an investment adviser. This is the other side of the coin & equally absurd IMO.

      The world is corrupt, let’s pass some more laws, that will fix it, right?
      Sorry to have repeated ‘due diligence’ so many times, I really thought my post was self explanatory. Apparently I did a poor job.

      Caveat Emptor

      • walter map says:

        So much defensiveness. Are you a financial advisor by any chance?

        “Personal responsibility is what is needed”

        It isn’t possible for many people to do the kind of “due diligence” needed to find out if you’re a crook, or to avoid many of the sophisticated threats in a complex modern world. Even smart young well-to-do people have lead in their water. Perhaps you’re one of them. Given peoples’ limitations it is always necessary to trust others at some point. Although trust in you would certainly be misplaced, wouldn’t it?

        One perceives you’re one of those libertarian predators who insists the vulnerable fend for themselves so nothing comes between you and your next victim. Easy pickings, eh?

        • Bigfoot says:

          Mr. Map

          Defensiveness- You asked me to ‘defend’ a statement, said you would be waiting, & I did. You essentially called me out because you don’t like or understand my opinion. It is duly noted that you failed to answer ANY of my questions. Not a single one. Instead, you choose to obfuscate the discussion by deciding who & what I am along with hurling out personal slurs. Classy.

          To reiterate, according to you, I’m a young libertarian predator, untrustworthy, head underwater, looking for my next easy pickings.

          Please go back & slowly reread what I posted & then try to answer my questions. I answered yours. Take your time. We’ll wait. Try to state your position without the personal slurs.

      • walter map says:

        ‘If the customer has not taken the time to educate himself (again, due diligence) & the ALLOWS themselves to be blindly led to a product that might not be a good fit, they get what they deserve!’

        Does a jury usually buy that argument?

        “I personally don’t need any more damn laws.”

        One gets the feeling there are plenty which already fit you nicely.

  7. Paulo says:

    My favourite Financial Advisor clip.


    On a personal note, when I used to live in a small city of 30,000 we knew all the local advisors and companies. Some, were just plain incompetent. We ended up switching to the advisor where we banked…the local Credit Union. They were on salary so did not bang any particular drum other than doing what was best for their clients. At 55 we switched to safe investments like GICs, etc.

  8. Kreditanstalt says:

    North Americans have only themselves to blame.

    We live in a culture which worships ‘professionals’, ‘experts’ and of course central planners. Here in Canada there is an almost obsequiously obedient trust in government, seen as an impartial force for good – and by extension in doctors, lawyers, firemen, police, dentists, accountants, ‘financial planners’ and indeed all ‘experts’.

    This goes one further: Canadians are risk-averse. They are huge consumers of INSURANCE. House insurance. Fire insurance. Car insurance. Life insurance. Travel insurance.

    And in government programs, all of which which amount to collective insurance schemes. It’s almost sinful here to be a “health insurance denier”, to attack socialized medicine or the “Canada Pension Plan”. Or to advocate privatizing “fire protection” and making it optional. Or private policing, etc.

    Too many armchair investors have had it too easy for too long, sitting there imagining that their ‘financial advisor’ had banished RISK…

    The real world, in which bad things can and must sometimes happen, will hopefully intrude on this dreamland eventually.

    • walter map says:

      “Too many armchair investors have had it too easy for too long, sitting there imagining that their ‘financial advisor’ had banished RISK…”

      And yet, the whole point of paying a financial advisor is to reduce risk – not to become the major source of it.

      It’s perfectly characteristic of rent-seekers to also seek to get themselves off the hook, and as usual the easiest way to do that is to blame the victims who did nothing worse than pay for honest assistance. And therefore also the vilest.

      It would seem that he who hires a financial advisor increases risk. One wonders if a well-considered cost-benefit analysis would leave any of them employed.

    • Bigfoot says:

      Thank you sir, well said !

  9. d says:

    Making them Fiduciary, makes them a little more Accountable, and Culpable .

    Most American’s dont respect Fiduciary responsibility either.

    Real Fiduciary advisers, will be hellishly expensive in the US, as there are no kickbacks or Crony deals, to Fiduciary advisers or the entity’s they work for, If the entity or adviser is truly Fiduciary.

    • walter map says:

      “Real Fiduciary advisers, will be hellishly expensive in the US”

      Less expensive than hiring one who is not so accountable, for the simple reason that the cost is up-front and not open-ended, and you’re not paying someone to defraud you.

      • Sgt Milstar says:

        All of this subject will be a moot point in the future. Artificial Intelligence will replace the advisers. It already is happening on Wall Street.

        Link: http://www.nytimes.com/2016/02/28/magazine/the-robots-are-coming-for-wall-street.html?_r=0

        In the future programming will be seized and analyzed for fraud.

        • walter map says:

          There’s a thought. Instead of nuking the planet and sending out Terminators, SkyNet can simply bankrupt the world and suck up everybody into the Matrix. For all we know the liquidation has already started.

          Isn’t technology wonderful?

        • Petunia says:

          There is no such thing as artificial intelligence and computer programs can be changed every day. Keep that in mind when they try to sell you the computer is in charge crap.

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