Ethics Center: Business Ethics

Financial Advisors Behaving Badly: Turning Lemons into Lemonade

Nearly 8 percent of securities-licensed financial advisors have engaged in misconduct over the past ten years. That’s according to three U.S. business-school professors who released their findings in a new study entitled, The Market for Financial Advisor Misconduct. If you’re an experienced financial professional, you might ask, “What else is new?” But consumers looking to hire a financial advisor for the first time, or to switch advisors, may view this information with alarm.

Most advisors recognize the industry has a lingering ethics problem. The problem is securities brokers and their broker-dealers can make more money bending rather than complying with the rules. So great is this temptation that the industry’s regulatory apparatus is largely powerless to deal with it. Also relevant is the fact that brokers have traditionally been held to a suitability standard, which allows them to sell sub-optimal products with legal impunity.

The results aren’t pretty. According to the University of Minnesota’s Mark Egan and the University of Chicago’s Gregor Matvos and Amit Seru, 12 percent of active FINRA BrokerCheck files included a disclosure event from 2005 to 2015. These incidents related to “any sort of dispute, disciplinary action, or other financial matters concerning the advisor.” However, since not all of the events resulted from misconduct, the professors honed in on the inputs that did. These included behaviors “tied to unsuitable investments, misrepresentation, unauthorized activity, omission of key facts, fraud, negligence, and excessive trading.”


Naming Names

The professors weren’t shy about naming names. According to their study’s ranking, Oppenheimer had the highest misconduct rate, with nearly 20 percent of their advisors having one or more black marks on their FINRA BrokerCheck record. Other firms in the top five were First Allied Securities (17.72 percent), Wells Fargo Advisors (15.30 percent), UBS Financial Services (15.14 percent), and Cetera (14.39 percent).

To the industry’s credit, firms terminated half of the offending advisors, the study reports. But 44 percent of those fired for misconduct wound up getting hired by another company that had an even higher rate of misconduct than their prior firm did. This suggests that some firms tolerate misconduct as a strategy to grow profits and that prior offenders in misconduct-tolerant firms are five times more likely to offend again.

Clearly, the securities industry has not welcomed the study, with some firms criticizing the professors’ methodology. Others welcomed the findings, viewing it as a catalyst for reform. But is the study a total lemon for the entire industry, including insurance and investment-advisor licensees, or is there an opportunity to make lemonade? The latter, and here’s why.

Financial advisors with exemplary records now have an opening to set themselves apart from the eight percent of professionals with dubious integrity.  They can now tout their commitment to ethical business practices and enthusiastically refer prospects to their BrokerCheck, insurance-department, or SEC records. To get even greater mileage, they can purchase a Certified Background Check from the National Ethics Association and highlight the resulting badge on their marketing collateral and web site. And if they have a clean E&O insurance history, they can mention that fact, as well.

Because at the end of the day, even though the financial-services industry has misconduct issues with some advisors, the vast majority operate within the framework of ethics and compliance. Reminding your prospects of this will go a long way toward establishing trust, closing sales, and creating long-term and profitable client relationships.

For information on affordable errors and omissions insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.