It just got even harder to trust

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It Just Got Even Harder to Trust Financial Advisers

A new working paper by business school professors at the University of Chicago and University of Minnesota found that 7 percent of financial advisers have been disciplined for misconduct that ranges from putting clients in unsuitable investments to trading on client accounts without permission. … some large, well-regarded firms have misconduct records that far exceed the average. Nearly 20 percent of financial advisers at Oppenheimer & Co., with more than 2,000 advisers counted in the study, have misconduct records, according to the new paper.

‘It’s everywhere, not just small firms. It is pervasive,’ said Amit Seru, a finance professor at the University of Chicago’s Booth School of Business and a co-author of ‘The Market for Financial Adviser Misconduct.’

Seru considers the study to be conservative in measuring misconduct. The paper homed in on just six of 23 categories of disclosure in the BrokerCheck database considered ‘indicative of adviser misconduct.’ … The study counted as misconduct disclosures about an ‘investment-related arbitration or civil suit … that resulted in an arbitration or civil judgment for the customer,’ as well as formal proceedings by regulators ‘for a violation of investment-related rules,’ among other alleged infractions. …
About half of advisers found to have committed misconduct are fired—although 44 percent of advisers who leave a job due to misconduct are hired by another firm within a year, according to the paper. Many fired advisers end up moving to firms that have higher rates of misconduct than their previous employer did, and they become repeat offenders. … ‘some firms have a high tolerance for misconduct on the part of their employees, but that their very business model is to attract the broker who can generate high revenue at the cost of repetitive disciplinary violations,’ said John Coffee, a professor at Columbia Law School in New York. …

The first-of-its-kind study names names, listing 10 advisory firms with the highest misconduct rates, as well as those with the lowest.”


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