According to reports, more than half of all households use a financial planner. Unfortunately broker misconduct is prevalent. How can you tell if your broker has a fraud record?
Close to 7 percent of 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.
Misconduct can include recommending unsuitable investments and misrepresenting or omitting key facts. Or it could mean “excessive trading,” negligence, or trading on a client’s account without his or her permission. Of the registered advisors who engaged in misconduct at least once, 38 percent are repeat offenders.
A fraud record is not necessarily the end of the line, though. 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.
In terms of location, 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.
How to Check your Broker’s Record
The Central Registration Depository (CRD) is a computerized database that contains information about most brokers and their representatives. 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’ educational backgrounds and employment history.
Financial Industry Regulatory Authority (FINRA) provides you with information from the CRD. Because your state securities regulator may provide more comprehensive information from the CRD than FINRA, especially when it comes to investor complaints, you may want to check with your state securities regulator first. You’ll find contact information for your state securities regulator on the website of the North American Securities Administrators Association. To contact FINRA, either visit FINRA’s BrokerCheck website or call FINRA’s toll-free BrokerCheck hotline at (800) 289-9999.
Brokerage firms are required to adequately supervise their agents. They can 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, 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.