You Call This a Study?
Brokers are lashing out at a new academic report detailing high levels of misconduct among financial advisors.
Although some readers say it is hardly surprising to learn that more than 10% of registered representatives have a disciplinary report attached to their Finra BrokerCheck reports, they homed in on some meaningful flaws in the study’s methodologies and conclusions. And they also note that a BrokerCheck “misconduct” recording does not necessarily imply guilt.
Their concern was no doubt heightened, however, by the decision of business professors at the University of Chicago and University of Minnesota to release their working paper, “The Market for Financial Adviser Misconduct,” on the eve of the SuperTuesday presidential contest. Both Republicans and Democrats are outgunning each other to prove themselves champions of John and Jane investor in their battle against the bad boys and girls of the financial services industry.
Bloomberg’s headline on the paper says it all. “It Just Got Even Harder to Trust Financial Advisers.” Or, as Time puts it: “A New Reason to Check Your Financial Adviser’s Record Right Now.”
The report included lists of the worst and best firms as measured by percentages of advisers with disciplinary records.
Response from our readers to our brief report on the academic paper was rapid. While we prefer readers to identify their current or former employers to help us gauge bias, the sources of some of our unsigned messages were pretty clear.
“Don’t know if the % [of brokers with bad marks] reported are accurate but Janney’s headcount is half of what is reported [in the study],” said a Janney Montgomery reader who declined to leave a name. “I seriously doubt the other number [a 13.9% firmwide “misconduct rate”] is accurate either, based on my experience with pre-hire scrutiny.”
As we noted, Mark Egan, a professor at the University of Minnesota and one of the study’s principal authors, told us that the findings might be skewed by the fact that BrokerCheck lists not just retail-oriented advisors but all registered persons, even if they are traders and institutional salesmen who don’t interact with the public.
That undoubtedly helps lower firmwide misconduct rates at Goldman Sachs, Morgan Stanley and other companies with large institutional businesses and sophisticated clients, and makes retail-dominated firms such as Janney and Oppenheimer (the study’s number one offender) look worse.
“A trader doesn’t necessarily interact with clients [but] would be counted as a financial advisor,” Egan said.
It also explains why Wells Fargo’s all-retail Financial Network ranked as one of the three worst firms with an almost 16% misconduct rate while Wells Fargo Securities, the giant bank’s institutional securities arm, ranked in the top 10 Best firms. Similarly, UBS Financial Services turns up on the study’s 10 Worst list while UBS Securities is on its 10 Best list. (Like FiNet, more than half of the ten worst offenders in the study were independent broker-dealers.)
None of these explanations, to be sure, explains some of the sloppiness of the report, a quality that is likely to erode the importance of some of its conclusions (including of the report. Names of firms are misspelled in the study (for example, independent brokerage Cetera Advisors is rendered as Cetara Advisers) and distinctions between holding companies and various subsidiaries are not made. The study’s databases simply used the broker-dealer names transcribed for each registered employee from his or BrokerCheck listing.
We urge readers to take a close look at the study, and ignore the seemingly gross errors. (Yes, we have heard from numerous UBS advisors that the paper’s listing of 12,175 FAs significantly overstates the approximately 7,000 advisors at UBS Wealth Americas. As we noted, the working paper’s database includes registered advisors who do not work with retail clients.)
The working paper analyzes all Finra/NASD-registered names from 2005 to 2015, meaning that the number-crunching is not meant to be a snapshot of any firm’s current roster of advisors.
Egan said that despite such drawbacks, the paper’s conclusions about qualitative differences among firms are defensible.
“We do get to see all of the registered financial advisers,” he said, and “to compare firms operating in the same business lines. We do this, precisely, in our regression [analyses].
“In the end, it is important to not forget one of the main messages of our analysis, (that) firms have different business models. Some specialize in such [misconduct] activity and cater to unsophisticated customers. Others use their reputation to cater to sophisticated customers.”
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