Why Your Financial Adviser May Not Be Trustworthy

Consumer Reports

Thu, Mar 3, 2016, 10:10 AM

According to a recent survey, brokers are trusted somewhat less than lawyers and Uber drivers. Perhaps for good reason: Over the past decade, 7 percent of financial advisers have had at least one act of misconduct on their record, according to a new study by scholars from the University of Minnesota and University of Chicago's Booth School of Business. That misconduct could include acts of negligence, misrepresentation and fraud, among other things.

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Furthermore, although these financial advisers are often dismissed from their original firm after being accused of misconduct, many are eventually re-employed elsewhere within the industry. At their new employer, according to the study, those individuals with an existing misconduct record are likely to rack up subsequent acts of misconduct at their new firm.

The study also found that certain financial firms had more brokers and financial advisers with black marks than others. The disparity among firms was exceptionally large. Only 0.8 percent of advisers at Morgan Stanley have misconduct records, while nearly one in five advisers at Oppenheimer & Co. have some sort of misconduct record, according to data they collected from the Financial Industry Regulatory Authority (FINRA), the regulator of the U.S. securities industry.

In general, according to the authors, securities firms catering more to individual clients—retail investors, in industry parlance—were more likely to have a greater percentage of disciplined brokers than firms more focused on institutional clients.

In cases resulting in financial injury to investors, FINRA is ramping up sanctions. Last year, $96 million in restitutions were assessed by FINRA on financial advisers and brokers, triple the amount of previous years. About a quarter of those sanctions were based on suitability cases, where brokers and advisers placed clients in investments that were inappropriate for their financial needs. The bad news: not everyone entitled to some restitution may be able to collect.

The authors of the study relied on FINRA's BrokerCheck database to collect data for their findings. You can also use the database to check the record of your current financial adviser or an adviser you're considering.