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Are Financial advisors really less trustworthy than Uber drivers?

“Yes,” say researchers from the University of Minnesota (Mark Egan) and the University of Chicago (Gregor Matvos and Amit Seru), who constructed the first large-scale study documenting the economy-wide extent of misconduct among financial advisors and financial advisory firms.

Ouch! According to the study published earlier this month, entitled: “The Market for Financial Adviser Misconduct,” one in 13 financial advisers has a misconduct-related disclosure on his/her record. From a sample representing 10 percent of employment in the finance and insurance sector, the study reports more than 12 percent of financial advisors have a disclosure on their record, roughly seven percent of advisors have been disciplined for misconduct or fraud and that prior offenders are FIVE times as likely to engage in new misconduct as the average financial advisor.


It gets worse

Bad actors do get disciplined. Approximately half lose their jobs after misconduct. The rest remain with the same firm after a year. However, 44 percent are back on the job somewhere in the financial services industry within a year. Albeit after a “lengthier period of unemployment” and at a 10 percent reduction in compensation.


Where do “bad” advisors go?

To firms that also have higher rates of misconduct.   According to the researchers, misconduct varies across financial advisory firms. And some firms employ “substantially more advisors with misconduct records than others:

  • More than one in seven advisers at Oppenheimer & Co., Wells Fargo Advisors Financial Network, and First Allied Securities have engaged in misconduct in their past;
  • At Goldman Sachs & CO., and Morgan Stanley & Co. LLC, that ratio is less than one in one hundred; and
  • Advisors working for firms whose executives and officers have records of misconduct are more than twice as likely to engage in misconduct.”


Financial advisor misconduct is broader than a few, heavily publicized scandals. And it’s expensive. The median settlement paid to consumers is $40,000; and $120,000-plus at the 75th percentile. All told, these settlements have cost the financial industry nearly a half billion dollars/year.


Full disclosure

The survey’s findings ultimately suggest that greater market transparency and policies to help unsophisticated consumers access more information are the natural response to reducing misconduct. It cites such recent efforts by regulators as the establishment and promotion of FINRA’s BrokerCheck website as a good first step.


So, are you a good apple or…

Make oversight integral and ongoing. Why be that advisor or that firm? It’s less costly to do the right thing. Better to be safe,  secure and compliant.


Really! No one is immune from the regulators. No one. And compliance requirements continue to be more all-consuming. Don’t be that company. Let’s talk. Ask about Patrina’s comprehensive compliance solutions specifically designed for the financial services community.


Let’s talk (212- 233-1155).