Advisers With Records of Misconduct Often Rehired

Close to half (44%) of advisers who left their job following a misconduct disclosure were able to find employment within the same year. And financial advisers who engaged in misconduct were five times as likely to do so again as the average adviser.

Researchers determined that 7.28% of financial advisers employed between 2005 and 2015 have a disclosure indicative of misconduct. Financial advisers who engaged in misconduct were five times as likely to do so again as the average adviser.

More worrisome is that many advisers were rehired after having engaged in misconduct. Close to half (44%) of advisers who left their job following a misconduct disclosure were able to find employment within the same year. This compares to a 52% re-employment rate for those with no instances of misconduct who left their firms.

The study’s authors opine that the “substantial presence of repeat offenders implies that the industry does not immediately purge advisers who have engaged in misconduct.” This occurs even though about half of advisers left their firms in the year following misconduct.

Misconduct is related to a firm’s ethical standards. “Firms that employ more employees with records of misconduct are also less likely to punish additional misconduct,” observed the study’s authors. Advisers at such firms who engaged in misconduct were only slightly more at risk of being fired than those advisers who didn’t engage in such behavior. (The probability of being fired appeared to be tied to the size of the settlement, with larger settlements tied to a higher levels of termination.) Moreover, firms with higher incidences of misconduct were more likely to hire advisers who were previously disciplined for misconduct.

Financial advisers who engaged in misconduct tended to target individual investors. They were more likely to operate in areas with a less financially sophisticated, less educated and older population. Florida, Arizona and California had some of the highest incidences of financial misconduct, while the rates were the lowest in the Midwest.

Though more than 90% of advisers do not have any records of misconduct, the fact that more than one out every 13 do highlights the importance of conducting a background check before hiring a financial adviser or a broker. The data used by researchers for the conducting this analysis was pulled from FINRA’s BrokerCheck database (brokercheck.finra.org) as well as the Securities and Exchange Commission’s Form ADV (accessible at www.adviserinfo.sec.gov).

Source: “The Market for Financial Adviser Misconduct;” Mark Egan, Gregor Matvos and Amit Seru; National Bureau of Economic Research, February 2016.