How common is financial adviser misconduct?

Financial Adviser Misconduct
In an Abstract that precedes the main article in the journal, the authors wrote: “Seven percent of financial advisers have misconduct records, and this share reaches more than 15 percent at some of the largest firms.”

When we hear about financial adviser misconduct, it is usually on TV or in the press. The cases we hear about are mostly big scandals involving lots of money. However, how many cases do we never hear about?

In the United States, there are more than 650,000 financial advisers. They help manage more than $30 trillion of investible assets. They make up about 10% of total employment in the insurance and finance sector in the US.

Despite their importance and prevalence, many people perceive financial advisers as dishonest. In league tables, they consistently rank among the most dishonest or least trustworthy professionals.

Over the past decade, some highly-publicized scandals have shaped our perception of financial advisers.

Mark Egan, Gregor Matvos, and Amit Seru carried out a study on financial adviser misconduct. They wrote about their findings in the Journal of Political Economy (citation below).

Estimating prevalence of misconduct

The researchers constructed a panel database of approximately 1.2 million financial advisers registered in the US. The database spanned from 2005 to 2015 and contained the employment history of each financial adviser.

The authors analyzed data on customer disputes and disciplinary events reported by FINRA. The data is available in financial advisers’ disclosure statements. FINRA is the Finance Industry Regulatory Authority.

The authors wrote:

“We find that financial adviser misconduct is broader than a few heavily publicized scandals.”

One in every thirteen advisers had a misconduct-related disclosure on their record, the researchers reported. They also calculated that offenses committed by advisers cost the industry nearly half-a-billion dollars a year.

Roughly one-in-four advisers who had committed offenses were repeat offenders. Repeat offenders are much more likely to re-offend than the average adviser; in fact, five times more likely.

The authors wrote:

“This result implies that neither market forces nor regulators fully prevent such advisers from providing services in the future.”

Misconduct in established firms

Some firms employ considerably more advisers with a history of misconduct than others. At First Allied Securities, Wells Fargo Advisors Financial Network, and Oppenheimer and Co., more than one-in-seven advisers had a record of misconduct, the researchers reported. Contrastingly, at USAA Financial Advisors, the ratio was approximately one-in-36.

The researchers also found that advisers were twice as likely to commit an offense if their bosses had records of misconduct.

When dealing with offenses, most firms are quite strict. So, why are repeat offenders so common?

Many advisers who committed an offense and subsequently lost their jobs soon found employment again in the industry. Forty-four percent of them were back in the industry within a year. Often, they found jobs in companies with a high percentage of advisers with a record of misconduct.

According to a press release by the Journal of Political Economy:

“Rates of misconduct are 19% higher, on average, in regions with the most vulnerable populations, in counties where customers rank below national averages in terms of household incomes and college education rates.”

Current system not strict enough

The researchers’ findings suggest that current reputation concerns or the structure of penalties are not working. In other words, they are not deterring financial advisers from offending repeatedly.

The authors wrote:

“A natural policy response aimed at lowering misconduct would be to increase market transparency and provide unsophisticated consumers access to more information.”

The researchers suggested proposals to increase penalties for misconduct. Regulators could also mandate a fiduciary standard for all financial advisers, the authors added.


“The Market for Financial Adviser Misconduct,” Mark Egan, Gregor Matvos, and Amit Seru. Journal of Political Economy. DOI: The University of Chicago Press Journals.