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Surprise -- There's a Good Chance Your Broker Is Ripping You Off

By Selena Maranjian - Mar 9, 2016 at 8:01AM

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Good financial professionals can help us grow our nest eggs, save money on taxes, and plan effectively for the future. But lousy ones can really hurt us -- and apparently there are a lot of them out there.


Broker misconduct can be a matter of intentional financial damage -- or just inept bungling. Photo: Pixabay

It's reasonable to be intimidated by the world of investing as, after all, few of us ever learned much about it in school. Thus, it can seem as if a reasonable and safe thing to do is to seek out professional guidance or to simply accept professional advice that's offered. According to a recent study, though, it turns out that's not such a safe move.

Academics Mark Egan, Gregor Matvos, and Amit Seru at the University of Minnesota and University of Chicago business schools recently released some eye-opening findings in a report  titled "The Market for Financial Misconduct." They examined the records of more than a million financial advisors and former financial advisors between 2005 and 2015 and learned that a shocking 7% of them -- 87,000 in total -- had been disciplined for misconduct or fraud.

Before jumping into more details from the study, note that the 7% represents those that were misbehaving and discovered. The percentage of total misbehavers is likely significantly higher, as those who were never caught are not included in the 7%.

Image: ryanmotoNSB, Flickr.

Here are some additional tidbits from the study [opens PDF], along with some important considerations:

  • According to a 2010 study, 56% of American households had consulted financial professionals for advice. In other words, financial advising is big business. Indeed, the Egan, Matvos, and Seru study noted that more than 650,000 registered financial advisors manage more than $30 trillion in client money. Thus, if even 1% of these pros were misbehaving it would be bad news for lots of people and would likely involve a lot of people. But it's 7%.

  • The 7% is a rough average. The study also reported on which financial services companies had the best and worst records. According to the study, four firms had 15% or more of their professionals having been disciplined for misconduct. By contrast, two firms had fewer than 1% of their advisors having received such discipline, including Morgan Stanley at 0.8% and Goldman Sachs at 0.9%. 
  • There was a wide range of complaints  that led to the misconducts studied. The top ones were unsuitable advice (21.3%), misrepresentation (17.7%), unauthorized activity (15.1%), omission of key facts (11.6%), fees/commissions (8.7%), and fraud (7.9%). These can serve to remind us to be vigilant when consulting advisors, asking a lot of questions and keeping an eye on our accounts and their actions. It can be helpful to find out whether your advisor is held to the "fiduciary" standard, which requires offering advice that is in the client's best interest. Non-fiduciaries can get away with simply offering suitable recommendations that may earn them bigger commissions than better recommendations would.

  • It's not just stock-related advice that has gotten many advisors (and their clients) in trouble. Per the study, the specific products  involved in the most misconduct were insurance (13.8%), annuities (8.6%), stocks (6%), and mutual funds (4.6%). The majority of instances, about 70%, though, fell in the "other/not listed" category. Still, this is a warning that consumers may be bamboozled more often regarding insurance and annuity products than stocks or funds.

  • Fully half  of the 10 counties in the U.S. with the highest misconduct rates are in Florida, reflecting the fact that many dastardly types target retirees and the elderly, as they often have significant assets and can be extra trusting sometimes.

  • Misbehaving financial advisors don't just go away once they're disciplined. According to the study, about half of them keep their job, while many others simply find other jobs in the same industry -- and many become repeat offenders.

The entire study is a useful wake-up call to all of us who do or might tap the services of a financial advisor. It's not a dumb thing to do -- good financial professionals can help us grow our nest eggs, save money on taxes, and plan effectively for the future. But lousy ones can really hurt us -- and apparently there are a lot of them out there. One way to protect yourself is to do a little digging into a broker's background. The BrokerCheck service from the Financial Industry Regulatory Authority can help you there.

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