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FINRA runs a public database, BrokerCheck, which investors can use to research representatives and firms. The researchers
used the FINRA data to build their own database, including in it the 1.2 million financial advisers registered in the US from
2005 to 2015. The researchers’ database represents about 10% of people employed in the finance and insurance sectors.
The data reveal that more than 12% of active financial advisers’ records have a disclosure, which can indicate any sort of
dispute or disciplinary action, alleged or established. Approximately 7% of active advisers have been disciplined for
misconduct or fraud. Of the advisers who have engaged in misconduct, 38% are repeat offenders. “This simple summary
statistic strongly suggests that misconduct does not arise due to bad luck or random complaints by dissatisfied customers,”
write Egan, Matvos, and Seru.
More than half of misbehaving advisers stay with the same firm after a year, according to the data. Of those who leave,
44% quickly (within a year) find new jobs in the industry.
Some consolation for investors: even accounting for reemployment, advisers who engage in misconduct are more likely
to leave the industry or have longer periods of unemployment. When they find new jobs, they tend to take pay cuts of
10%, and land at companies considered less desirable places to work.
Financial advisers’ misconduct records are public information, which should help to prevent and punish misconduct. But
according to the research, neither market forces nor regulators are successfully preventing crooked advisers from
continuing to provide their services.
57 | TECHNICALLY SPEAKING APRIL 2016