Broker Behavior Is Worse Than We Thought...

by Kristin Orman, Research Analyst

033016IU_table

Editorial Note: Okay, you got us... this week’s chart is technically a table. Nevertheless, broker misconduct is a dangerous trend every investor must be aware of. If you’re a Wealthy Retirement (which is also published by The Oxford Club) subscriber, you may have already read some of Kristin’s thoughts on the subject. But in the article below, she expands on why doing your own due diligence is critical when hiring a money manager... and what powerful free resources are at your disposal.


Wall Street’s rogues have been preying on individual investors for years. Most Americans hear the term “broker” and think of slick, shifty characters like Gordon Gekko and Jordan Belfort. There’s not much love for the occupation.

But the problem is even worse than we thought...

There’s an estimated $30 trillion being managed on behalf of the American people. Fifty-six percent of households say they use a financial professional to make their investment decisions.

Obviously, it’s our view that investors should sit up, take notice and - most importantly - take action. (Ryan Fitzwater most recently expressed this opinion here and here.) But today’s chart should serve as a wake-up call for a lot of folks...

If you have entrusted your savings with a broker at any of the firms listed above, your retirement could be at risk.

The list comes from a new study by the University of Chicago in conjunction with the University of Minnesota. It examined six of the 23 types of disclosures in the Financial Industry Regulatory Authority’s BrokerCheck database.

Reports from FINRA’s database will tell you about a broker’s or firm’s work history, as well as information regarding customer complaints, regulatory actions and criminal convictions.

This new study found that 7% of active advisors have been disciplined for misconduct or fraud...

And 38% of those who engaged in misconduct did so more than once.

Surprisingly, 73% of brokers who’ve been disciplined are still working in the industry - handling customer accounts - a year after disciplinary actions are taken.

More than half of them are still employed by the same firm. And of those who leave, 44% find a new firm within a year.

That’s a scary statistic for investors because brokers with just one mark on their license are five times more likely to commit another act of misconduct.

Many financial firms enable bad behavior by keeping and hiring brokers with a history of misconduct - and some firms employ more disciplined brokers than others. It’s not just the small operations, either. Plenty of the big boys employ these rascals at an alarmingly high rate.

Last year, Oppenheimer & Co. was the worst offender. Nearly 20% of advisors employed by the firm have had their bad behavior documented and/or fined. At Wells Fargo and UBS, the number is over 15%.

Clearly, some firms are more permissive of rule-breaking than others.

The results of this study highlight, once again, how important it is for investors to perform their own due diligence... to vet not only their current and prospective brokers, but the firms they work for as well.

FINRA’s website is a good place to start.

Of course, the only surefire way to ensure you don’t become a victim is to manage your own money. After all, if you want something done right... do it yourself.

Chart of the Week