American households rely on financial advisers for financial planning and management. Over 650,000 registered financial advisers in the United States help manage over $30 trillion of investible assets, and represent approximately 10% of total employment of the finance and insurance sector. As of 2010, 56% of all American households sought advice from a financial professional. Despite the prevalence and importance of financial advisers, they are often perceived as dishonest and consistently rank among the least trustworthy professionals.
While it is clear that egregious fraud does occur in the financial industry (i.e. Madoff Ponzi scheme, LIBOR fixing scandal), the extent of misconduct in the industry as a whole has not been systematically documented. Moreover, given that every industry may have some bad apples, it is important to know how the financial industry deals with misconduct. In particular, do firms and regulators discipline advisers who engage in misconduct? Or do such advisers survive and thrive in the industry? In our recent paper “The Market for Financial Misconduct” we attempt to provide the first large-scale study that documents the economy-wide extent of misconduct among financial advisers and financial advisory firms. As part of our analysis, we examine the labor market consequences of misconduct and study the allocation of advisers across firms in the industry after misconduct is publicly revealed.
To study misconduct by financial advisers, we construct a panel database of all financial advisers (about 1.2 million) registered in the United States from 2005 to 2015. The Financial Industry Regulatory Authority (FINRA) requires that financial advisers formally disclose all customer disputes, disciplinary events, and financial matters; FINRA makes these records publicly available on its website. We construct a measure of misconduct in the financial advisory industry that includes all customer, civil, regulatory, firm discipline, and criminal events resolved against the adviser. In the data, we observe the misconduct records of all advisers who have worked in the industry, including those with as little as one year of experience to over fifty years of experience.
We find that financial adviser misconduct is broader than a few heavily publicized scandals. One in thirteen financial advisers have a misconduct-related disclosure on their record. Misconduct is not frivolous and results in substantial costs; the median settlement paid to consumers is $40,000, and mean is $550,000. These settlements have cost the financial industry almost half a billion dollars per year.
The incidence of misconduct varies drastically across firms. Table 1 below displays the firms with the highest rates of misconduct. Oppenheimer, First Allied Securities and Wells Fargo Advisers Financial Network rank at the top of the list. Roughly 20% of the financial advisers employed by Oppenheimer have a past record of misconduct. The estimates reported in Table 1 are conservative in the sense that they include all registered advisers, not just those that deal with clients. Among only the client facing advisers, roughly one in three advisers at Oppenheimer have a past record of misconduct. At the other extreme, USAA Financial Advisers, which services military families, ranks among the best firms in terms of misconduct. One in thirty-six advisers employed by USAA Financial Advisers has a past record of misconduct.
Table 1: Firms with the Highest Incidence of Misconduct
| Rank | Firm | CRD | Misconduct | Total Advisers |
| 1 | OPPENHEIMER & CO. INC. | 249 | 20% | 2,275 |
| 2 | FIRST ALLIED SECURITIES, INC. | 32444 | 18% | 1,112 |
| 3 | WELLS FARGO ADVISORS FIN. NETWORK | 11025 | 15% | 1,797 |
| 4 | UBS FIN. SERVICES INC. | 8174 | 15% | 12,175 |
| 5 | CETERA ADVISORS LLC | 10299 | 14% | 1,432 |
| 6 | SECURITIES AMERICA, INC. | 10205 | 14% | 2,546 |
| 7 | NATIONAL PLANNING CORPORATION | 29604 | 14% | 1,760 |
| 8 | RAYMOND JAMES & ASSOCIATES, INC. | 705 | 14% | 5,495 |
| 9 | STIFEL, NICOLAUS & COMPANY, INC. | 793 | 13% | 4,008 |
| 10 | JANNEY MONTGOMERY SCOTT LLC | 463 | 13% | 1,394 |
| 11 | MORGAN STANLEY | 149777 | 13% | 23,618 |
| 12 | SAGEPOINT FIN., INC. | 133763 | 12% | 2,063 |
| 13 | WELLS FARGO ADVISORS, LLC | 19616 | 12% | 26,308 |
| 14 | FSC SECURITIES CORPORATION | 7461 | 12% | 1,373 |
| 15 | PURSHE KAPLAN STERLING INVESTMENTS | 35747 | 11% | 1,224 |
| 16 | ROYAL ALLIANCE ASSOCIATES, INC. | 23131 | 11% | 1,975 |
| 17 | RAYMOND JAMES FIN.SERVICES, INC. | 6694 | 11% | 5,176 |
| 18 | WOODBURY FIN. SERVICES, INC. | 421 | 12% | 1,377 |
| 19 | AMERIPRISE FIN. SERVICES, INC. | 6363 | 10% | 13,549 |
| 20 | INVEST FIN. CORPORATION | 12984 | 10% | 1,425 |
The incidence of misconduct also varies geographically. Table 2 displays the geographic dispersion of misconduct. While 32% of advisers in Madison County, NY have a past record of misconduct, only 2.6% of advisers in Franklin, PA have a past record of misconduct. Misconduct is geographically concentrated. Five of the ten highest ranking counties are located in Florida. More generally, we find the highest rates of misconduct in areas with more elderly and less educated populations.
Table 2: Counties with the Highest and Lowest Incidence of Misconduct
| Rank | County | Misconduct | |
| 1 | Madison, NY | 32% | |
| 2 | Indian River, FL | 19% | |
| 3 | Guaynabo Municipio, PR | 19% | |
| 4 | Monterey, CA | 18% | |
| 5 | Martin, FL | 18% | |
| 6 | Palm Beach, FL | 18% | |
| 7 | Richmond, NY | 18% | |
| 8 | Suffolk, NY | 17% | |
| 9 | Bay, FL | 17% | |
| 10 | Lee, FL | 17% |
| Rank | County | Misconduct |
| 1 | Franklin, PA | 3% |
| 2 | Saline, KS | 3% |
| 3 | Cerro Gordo, IA | 3% |
| 4 | Kenton, KY | 3% |
| 5 | Washington, VT | 3% |
| 6 | Bronx, NY | 3% |
| 7 | Rutherford, TN | 3% |
| 8 | Stearns, MN | 3% |
| 9 | Ottawa, MI | 4% |
| 10 | Boone, MO | 4% |
Relative to misconduct frequency, misconduct is too concentrated among advisers to be driven by random mistakes. Approximately one-third of advisers with misconduct records are repeat offenders. Past offenders are five times more likely to engage in misconduct than the average adviser, even compared with other advisers in the same firm, at the same location, at the same point in time. The large presence of repeat offenders suggests that consumers could avoid a substantial amount of misconduct by avoiding advisers with misconduct records.
The high rates of recidivism suggest that discipline is potentially lacking in the industry or by regulators, as a large number of advisers have the opportunity to reengage in misconduct. To assess magnitudes, note that firms in the industry are relatively strict disciplining misconduct. Half of advisers who engage in misconduct are separated from their firm the following year. However, the reemployment prospects of advisers with recent misconduct are relatively promising. Roughly half of those advisers who leave their firm following misconduct find new employment in the industry, typically in the same state and county. In total, 75% of advisers who engage in misconduct remain active in the industry in the following year.
Our work suggests that the current structure of penalties or reputation concerns may not be sufficient to deter advisers from engaging in misconduct. A natural policy response aimed at lowering misconduct would be to increase market transparency and provide unsophisticated consumers access to more information. It is therefore heartening to see that following the release of our study, there have been several attempts by regulators and policymakers to clampdown on “bad apples” in the industry.