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.
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.
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