Do Some Brokerage Firms “Specialize” in Misconduct?

In the United States, approximately 650,000 financial advisers manage more than $30 trillion in investor assets and the majority of American households (56% as of 2010) sought advice from a financial professional.  Given the importance of, and Americans’ reliance on, the financial service industry, the results of a recent study conducted by several professors at the University of Chicago and University of Minnesota are concerning.  Entitled “The Market for Financial Adviser Misconduct”, the Study analyzes the employment history and disciplinary actions of approximately 1.2 million financial advisers registered with the Financial Industry Regulatory Authority (“FINRA”) in the United States from 2005 through 2015.  The data for the Study was collected from FINRA’s BrokerCheck website.

According to the Study, approximately 7% of financial advisers have been disciplined for misconduct ranging from unsuitable investment recommendations to fraud.  Though the Study found that misconduct typically results in termination by the financial adviser’s brokerage firm in approximately half of all cases, forty-four percent (44%) of those advisers terminated are reemployed by another brokerage firm within a year.  The Study also found that approximately one-third of financial advisers with misconduct disclosures on their record were repeat offenders, and past offenders were “five times more likely to engage in misconduct than the average adviser, even compared with other advisers in the same firm at the same point in time.”  Financial advisers employed by firms whose executives and officers had misconduct disclosures on their records were also twice as likely to engage in misconduct themselves.

Perhaps the most disheartening conclusion based on the findings of the Study is that the misconduct is most heavily concentrated in areas of “low education, elderly populations, and high incomes.”  This seems to suggest certain firms may promote a culture of misconduct geared toward taking advantage of unsophisticated investors.

It is prudent for investors to thoroughly evaluate a financial adviser and brokerage firm before investing.  Investors can view publicly available information about firms and financial advisers registered with FINRA at  Additional information on the Study can be found here.  

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About Christine Goodrich

Christine E. Goodrich is a Senior Associate with Faruqi & Faruqi, LLP’s New York City office.  Ms. Goodrich’s practice is focused in securities arbitration, litigation and regulation.

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