Is Your Financial Adviser a Crook? Here’s How to Find Out

Misconduct is not uncommon among financial advisers in the U.S. Here's how to protect your hard-earned money from harm.

Is Your Financial Adviser a Crook? Here’s How to Find Out Photo by staras / Shutterstock.com

Misconduct is widespread among financial advisers — and some of the country’s largest financial advisory firms have the highest rates of misconduct, according to recent research.

The findings are detailed in an academic paper titled “The Market for Financial Adviser Misconduct,” which is set to be published in the Journal of Political Economy.

It shows that 7.3 percent of financial advisers in the U.S. have been cited for misconduct based on publicly disclosed data. The types of misconduct considered for the study include:

  • Customer disputes
  • Civil cases settled in the favor of the client
  • Criminal cases in which advisers were found guilty
  • Any firing for cause

Researchers ranked the firm Oppenheimer & Co. as having the greatest percentage of financial advisers with a record of misconduct — 19.6 percent. That firm is followed by First Allied Securities, with 17.7 percent, and Wells Fargo Advisors Financial Network, 15.3 percent.

You can search for other firms and view what percentage of their advisers have misconduct records on the website that accompanies the research.

Roughly 30 percent of advisers with misconduct records in the study are “repeat offenders,” according to the study. In fact, advisers with misconduct records are five times more likely to engage in misconduct again in any given year.

About half of advisers lose their jobs after being censured for abuses, but about half of those who lose their jobs get hired by other firms within a year. The paper notes:

“Firms that hire these advisers also have higher rates of prior misconduct themselves … Our findings are consistent with some firms ‘specializing’ in misconduct and catering to unsophisticated consumers, while others use their clean reputation to attract sophisticated consumers.”

How to vet financial advisers

Researchers found that adviser misconduct is also concentrated at firms that both serve retail customers (individual investors like you and me) and are in locations with older or less educated populations.

Study co-author Mark Egan, an assistant professor of finance at Harvard Business School, explains:

“A lot of this is driven by consumers who lack financial sophistication. Without good knowledge by consumers, that’s not something that competition will necessarily solve.”

This makes it all the more important not only to educate yourself about the basics of investing, but to vet financial advisers before entrusting them with your nest egg.

Egan urges concerned investors to use BrokerCheck, a database maintained by the Financial Industry Regulatory Authority. FINRA is a self-regulatory organization that oversees securities salespeople.

BrokerCheck is a free database that’s open to the public. As FINRA describes it:

“BrokerCheck helps you make informed choices about brokers and brokerage firms — and provides easy access to investment adviser information. … BrokerCheck gives you a snapshot of a broker’s employment history, licensing information and regulatory actions, arbitrations and complaints.”

The database is a great place to start when vetting a financial adviser, but it’s just one of several steps you can take to ensure your nest egg is in good hands.

For more steps you can take, check out “How to Choose the Perfect Financial Adviser.”

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Karla Bowsher
Karla Bowsher
I’m a freelance journalist and former newspaper reporter who has covered both personal and public finance. I've worked for a top 50 major metro daily and a community newspaper as well as ... More

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