Ever check your financial advisor’s history? You should

While the financial sector is not exactly the most reliable sector among Americans, there is a reason for investors to look closer at home by checking the backgrounds of their own advisors.

More than 7 percent of financial advisors have a history of misconduct, indicating “relatively common” problematic behavior ranging from putting a client in an inappropriate investment to total fraud, according to a new article from researchers at the University of Booth School of Business. Chicago and the Carlson School of Management at the University of Minnesota. .

While this is worrying enough, often these “bad apples” are not removed from the financial industry, the researchers found. Even if financial misconduct leads to the dismissal of this advisor to a company, they often find new jobs in a competitor. And once an advisor has committed misconduct, they are likely to continue their gloomy behavior, the researchers found.

“What surprised me was that this is a very competitive industry, there are a lot of companies and this information is very easily accessible,” said Gregor Matvos, one of the study’s authors and associate professor of finance at the University of Chicago. . . “Despite this, spotted consultants are hired by some of the largest companies in the industry. That was one of the biggest surprises.”

However, counselors with a history of misconduct often see their professional careers suffer. When they find work after an incident, it is often in a less prestigious company and with a lower salary. The result is that these advisors are hired from companies that already have staff with similar problems, and the researchers point out that it suggests a “concordance” between companies and advisors on the issue of misconduct.

So which companies fall into this category? The researchers, who collected information from FINRA’s BrokerCheck database of all financial advisors who worked in the US between 2005 and 2015, name names, citing the companies with the highest percentage of misconduct advisors in the past (see table below).

Oppenheimer & Co. tops the list, with one of five advisors with at least one misconduct incident on file, they found. In a statement, Oppenheimer said it has “made significant investments to proactively address risk and compliance issues in our private client division,” such as adding compliance and auditing professionals, upgrading its systems, and appointing a new one. senior leadership and a new global compliance officer.

“Oppenheimer recognized the need to address these inherited issues directly and we are confident that we have put in place safeguards to ensure that our advisors and other employees meet the highest ethical standards,” the company said.

Instead of relying on companies to employ only spotless advisors, which is not a fact, investors should consult FINRA’s BrokerCheck site to investigate their advisor, Matvos said. Some investors may not be aware of this resource, he noted. And there may be advisors who trust that.

Counselors with a history of misconduct are often found in geographic areas where a particular type of person can be found: someone rich, older, and less educated in financial matters. Some counties in Florida and California have a high percentage of “bad apple” advisors, with Monterey, California and Palm Beach, Florida, with rates of 18.4% and 18.1%, respectively, of advisors with bad conduct in the past.

“On average, with areas where we have seniors you’ll see more misconduct,” Matvos said. “Suppose you’re a surgeon. You’ve made a lot of money, but that doesn’t mean you’ve spent a lot of time figuring out how to create a portfolio.”

Since the average settlement for misconduct is $ 40,000, this suggests that these advisors are doing serious damage to homes, the researchers noted. Investors working with advisors with misconduct in the past could be putting their nest eggs at risk, the research indicates.

“People with previous misconduct are more likely to engage in misconduct,” Matvos said. “Once they do, they’re more likely to do it again. That’s true for all service sectors. There are good plumbers and bad plumbers. The question is how does the industry deal with these bad eggs? They continue to offer services, or do they disappear? Many of them seem to stay. “