How To Check Your Financial Adviser's Background

New Study Shows Financial Adviser Misconduct

How To Check Your Financial Adviser's Background
August 15, 2016

You have trust in your financial adviser — otherwise he or she would not be your adviser in the first place. Could that trust sometimes be misplaced?

Every industry includes some that bend or break the rules, but a recent working paper from the Booth School of Business at the University of Chicago suggests that misconduct is significant in the financial advisory field. One author of the working paper, Professor of Finance Amit Seru for the Booth School of Business, calls the misconduct "pervasive."

According to the Booth study, approximately 7% of advisers have faced disciplinary action for misconduct. The nature of the misconduct ranges from directing clients toward unsuitable investments for their situation (that new regulations will help to check for retirement funds) to unauthorized trading on their client's accounts.

Using BrokerCheck, a comprehensive database that is compiled and overseen by the Financial Industry Regulatory Authority (FINRA), the study authors summarized and analyzed disclosures in six categories considered "indicative of adviser misconduct." These categories include formal actions by regulatory agencies against an adviser "for a violation of investment-related rules," as well as having a successful investment-related arbitration or civil suit filed against the adviser.

Large, well-known names in the field were represented in the highest percentages of misconduct as well as the lowest. Firms with the highest incidence of misconduct in the study include Oppenheimer & Co. at a 19.6% rate of misconduct and First Allied Securities at 17.7%. The top ten highest percentage of misconduct were all above 13.2%. Meanwhile, the ten groups with the lowest incidence of misconduct were all below 1.75%, led by Morgan Stanley at 0.79% and the Goldman Sachs Group at 0.88%.

According to the press release accompanying the study, this research "indicates that misconduct is widespread in regions with relatively high-incomes, low education levels, and elderly populations." That seems contradictory, but it may simply mean that there are two general targets. One set of misconduct focuses on more vulnerable customers (the elderly and less-educated) while others are aiming for higher-value targets.

A large number of the misconduct cases were centered on unsuitable investment advice, such as steering an elderly client toward placing a large majority of assets into an aggressive-growth mutual fund with higher risks and potentially higher fees. Insurance products were often involved in the reported misconduct cases.

Financial firms do discipline financial advisers that violate the rules, but repeat offenders are not uncommon. Approximately half of advisers that are judged to have engaged in misconduct are terminated, but 44% of those advisers find another job in the field within one year after being fired.

The recidivism rate is high as well. Those who committed misconduct in the past are five times as likely as the typical adviser to engage in misconduct again.

The problem may be even worse than the study implies. Seru believes the Booth study is being conservative in its assessment, given that only six categories of misconduct were assessed but the BrokerCheck database contains 23 such categories. Only firms with at least 1,000 advisers were included in the study. Further, any broker not registered with FINRA will not show up in the database.

Protect yourself and be proactive in checking out your financial adviser through BrokerCheck as well as other resources such as the Better Business Bureau. Make online checks a part of your research before choosing a financial adviser. You probably comparison-shop for online purchases; surely it is worth putting in at least as much time researching the potential director of your finances.

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Jonathan | 07.12.16 @ 22:01
When trusting someone with your life saving you have to be sure they're not a crook!
STOKES | 07.12.16 @ 22:01
This is great advice. Most people don't think to check their financial advisor's background.
trish | 07.12.16 @ 22:05
So smart to do this!!! Ours was checked by my brother in law but I seriously never thought about this
Wanda Langley | 07.12.16 @ 22:05
I would not of thought of checking my Advisors Background but makes me think about me now.
Erin | 07.12.16 @ 22:06
It's good there is an easy way to check on the background of the person who is supposed to be helping you grow your financial wealth. I guess I'm not surprised that the rate of misconduct is that high. I was actually expecting it to be a bit higher, in all honesty.
Meredith L | 07.12.16 @ 22:08
It's so important to do more research on the people who are dealing with your money! Don't be taken by a scammer or someone with THEIR interest in mind.
Carla | 07.12.16 @ 22:11
Background checks are a must! It is your money and your life you are dealing with.
Victor | 07.12.16 @ 22:14
Wow this is great information to have when you think that you a entrusting your future to someone you need to know this information, do you imagine a financial advisor with bad credit!!!
Sarah | 07.12.16 @ 22:28
This is great. I'm a sceptical person so having ways to check up on them is perfect
Jo Ann | 07.12.16 @ 22:29
This is great information to check out before taking a financial advisors advice. An ounce of prevention goes along way in protecting one's investments.
Jonathan Dyer | 08.16.16 @ 18:29
Very helpful info. I can't help but wonder how many younger people are now foregoing financial advisers all together and just sticking to the advice of family and blog posts.
$commenter.renderDisplayableName() | 11.25.20 @ 07:39