Financial Advisor Fraud and Broker Misconduct

How can you tell if your financial advisor has a fraud record?

According to reports, more than half of all households use a financial advisor. Unfortunately broker misconduct and financial advisor fraud is prevalent. How can you tell if your broker has a fraud record?

Close to 7 percent of financial advisors have been disciplined for a fraud dispute or some form of misconduct, according to a 2016 academic study, “The Market for Financial Adviser Misconduct”  from the University of Minnesota and the University of Chicago.

A fraud record is not necessarily the end of the line, though.  Of the registered advisors who engaged in misconduct at least once, 38 percent are repeat offenders.While roughly half of advisors lose their jobs after an offense, 44 percent are back in the industry within a year.

That’s especially troubling, as “prior offenders are five times as likely to engage in new misconduct as the average financial advisor,” according to the study.

It’s likely that the actual rate of fraud and misconduct is much higher.  The authors pored through disclosure information in FINRA BrokerCheck, a database run by the industry’s self-regulatory organization, the Financial Industry Regulatory Authority (FINRA).  The database gathers data from regulatory filings and from information that firms and investment professionals must file with FINRA.

The Financial Industry Regulatory Authority (FINRA)

FINRA is the independent, non-governmental agency that licenses and regulates stockbrokers and brokerage firms in the U.S. What most investors don’t realize is that FINRA’s budget is largely paid for by the very brokerage firms it regulates – creating a fairly obvious conflict of interest.

Although FINRA requires brokers and brokerage firms to report customer complaints and disputes, as well as regulatory sanctions, it is fair to question whether FINRA is doing the best job possible to rid the industry of “rogue brokers.”

The clients most vulnerable to misconduct may be the ones in need of the most assistance, according to the study. Misconduct was concentrated in firms that cater to retail investors who buy and sell for their personal accounts.  The most common victims were elderly, those with high incomes, and low education.

The worst performer in the study was Oppenheimer & Co., where 19.6 percent of the firm’s 2,275 advisors had been disciplined for misconduct. Morgan Stanley, with 3,807 advisors, had the lowest rate: 0.79 percent.

The states with some of the highest rates of misconduct were Arizona, California and Florida. In 2015, FINRA barred 500 individuals and 25 firms from the industry.

Common Types of Broker Misconduct and Financial Advisor Fraud

“Selling Away”

Selling away is when a broker or financial advisor solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities are a violation of securities regulations. Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments, and often these are investments that the broker has some pecuniary interest in. Such an investment is generally a violation of securities rules because the brokerage firm has not researched the risks of the investment or approved the investment for sale to its clients, and the broker is selling the investment without the knowledge of his employer. Nonetheless, a broker-dealer can be held liable for a financial advisor’s “selling away” for failing to adequately supervise its employees and protect its clients.

Churning/Excessive Trading

If a broker is constantly buying and selling in the account, this may be evidence of churning, which means engaging in excessive trading in order to generate commissions for the broker. Such activity constitutes another form of securities fraud. Even if the broker is constantly calling the customer prior to placing the trades, this activity is still improper where the broker is abusing the account for his own purposes.

Misrepresentation or Omissions

Sometimes a customer will complain that the broker said that something was a very safe investment but the customer later discovered that in fact it was very risky. Customers rely upon the recommendations of financial advisors, and failure to properly disclose the risk is a misrepresentation or material omission. Unfortunately, many investors do not discover the truth in such cases until after they have incurred substantial losses and then realize that the investment was not so safe in the first place. But this should be distinguished from the situation of an experienced, wealthy investor who wants to speculate with a portion of his portfolio, understands the risk, is willing to take the risk, and is able to afford the risk.

Unsuitability

Brokers investment recommendations must be in with the customer’s age, financial situation, investment objective and investment experience. Investment in a particular type of security may be unsuitable, or the amount or frequency of transactions may be excessive and therefore unsuitable for a given customer.

Unauthorized Transactions or Trading

Sometimes a customer may be surprised to discover certain trades made in his account which had not been previously discussed by the financial advisor This constitutes unauthorized trading, which is prohibited. Sometimes a broker may call the customer after the fact and say that he has just placed a particular trade in the account. The mere fact that the broker informed the customer of the trade afterwards does not make that manner of trading acceptable. However, if the customer indicates his acceptance of the trade, that may be viewed as ratification of the broker’s act.

How to Check your Broker or Financial Advisor’s Record

The Central Registration Depository (CRD) is a computerized database that contains information about most brokers and their representatives. You can check for proper licensing in your state and if they have had disciplinary problems or received serious complaints from investors. You can also find information about the brokers’ employment history and whether or not they have ever filed for bankruptcy.

The Financial Industry Regulatory Authority (FINRA) provides you with information from the CRD on it’s BrokerCheck website.

Recovery of Investment Losses

Brokerage firms are required to adequately supervise their agents. They can be held responsible for any losses in a FINRA arbitration claim if it is determined that they failed to properly supervise their agent.

 If you have suffered investment losses due to financial advisor fraud, the attorneys at The White Law Group may be able to help. For a free consultation, please call (888) 637-5510.

The foregoing information, which is all publicly available on FINRA’s website, is being provided by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Franklin, Tennessee.

For more information please visit www.whitesecuritieslaw.com.