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‘Wandering’ Bad Brokers Pose Risks for Clients, Industry

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What You Need to Know

  • Many advisors with a history of misconduct move on to other firms and often continue to engage in misconduct, according to a research paper.
  • A larger number who are barred from the sector move on to the insurance sector and engage in misconduct.
  • More than one in seven advisers at Oppenheimer, Wells Fargo and First Allied have a record of misconduct, an earlier research paper said.

CORRECTION: The original version of this story quoted a research report from the New York University School of Law and Stanford Law School that mentioned a broker who had been barred by the Financial Industry Regulatory Authority. The report stated that “rather than continue to contest these allegations, Mr. Black simply decided to continue his work as an insurance producer registered with the State of North Carolina.”

Black did, in fact, contest the allegations made against him, in 2015, as a disclosure points out on his report at FINRA’s BrokerCheck website. The story has been corrected to reflect this fact.

Financial advisors and brokers with a long history of misconduct are likely to keep engaging in misconduct, and that continues to be the case with many of them — even if they are barred from the business by regulators, according to a recent New York University School of Law and Stanford Law School research report.

“Financial-advisor misconduct has significant consequences for investors, so a wide range of federal, state, and self-regulatory institutions have authority to detect and deter such misconduct,” the report noted.

“But each regime takes meaningfully different approaches to these tasks, creating incentives for advisors, particularly those with a history of harming investors, to seek a more lax regulatory environment,” it said.

While many advisors and brokers who are terminated from one firm for misconduct often move on to one or more other firms — where at least some of them continue to engage in misconduct — others end up barred from the sector, but then they move on to the insurance sector where many of them continue to engage in misconduct, the research paper states.

Wandering advisors are akin to the “phenomenon known as regulatory arbitrage, in which there is an incentive to shop around for the least restrictive regulator if you’re planning on pushing the limits,” according to Michael Finke, professor of wealth management at The American College of Financial Services.

“Unfortunately, uneven enforcement among states appears to create opportunities for advisors who have a history of misconduct,” Finke told ThinkAdvisor on Friday. “This phenomenon exists both among regulatory regimes in financial services and among firms that attract a larger percentage of advisors who have a history of taking advantage of clients,” he added.

More Findings

The authors used a novel dataset of 1.2 million advisors across four major regulatory regimes for their research, they said in the document.

According to their data, “a little over a third” of the 400,000 advisors “who exit the brokerage industry remain in at least one other regime.”

Their research also found that “advisors are significantly more likely to change regimes after committing serious misconduct, and that wandering advisors with a history of misconduct are significantly more likely to engage in future misconduct,” the paper said.

Such advisors are “over 40% more likely to be recidivists relative to other advisors with misconduct who do not change regulatory regimes,” it explained.

The authors also found that “wandering” advisors with a history of major misconduct “disproportionately end up in the highly fragmented state insurance regimes,” the paper said. Plus, none of these conclusions bode well for the financial services sector.

“Consumers seem to have a negative view of the financial-advice profession,” according to the paper. “One recent survey concluded that the financial services sector is the least trusted industry in the national economy; another found that consumers were more likely to trust their Uber driver than their financial advisor. And the regulatory patchwork may contribute to consumers’ negative view of advisors.”

A Wandering Broker

As an example of such a wandering advisor, the paper pointed to Frank Black, a broker who was barred by the Financial Industry Regulatory Authority from associating with any FINRA member firm, effective May 23, 2019, for securities violations that allegedly included fabricating documents and providing false testimony to FINRA, according to his report on FINRA’s BrokerCheck website.

Black denied the allegations and appealed the decision in 2015, as a disclosure points out on his report at FINRA’s BrokerCheck website. An appeal was still pending as of Monday, according to BrokerCheck.

Meanwhile, he continued his work as an insurance producer registered with the State of North Carolina, according to the paper.

“Today, he oversees the work of 85 financial advisors across 48 states,” the paper says, adding that his firm’s website “describes his decades-long brokerage career, making no mention of his lifetime ban. Instead, the firm advertises its services by quoting Mr. Black’s long experience — and his claim that, when it comes to giving investment advice, “[c]lient[s come] first. End of story.”

After working for firms that included Merrill Lynch, Black founded Southeast Investments in Charlotte, North Carolina, the paper says. Although his association with that firm ended in 2019, according to BrokerCheck, his LinkedIn profile says he remains its CEO and chief compliance officer.

Black did not respond to a request for comment on Friday, when Southeast’s website was down.

Of the wandering advisors who, like Frank Black, leave the brokerage industry after serious misconduct, most continue to work as state-registered insurance producers, according to the paper, written by Colleen Honigsberg, associate professor of law at Stanford Law School; Edwin Hu, research fellow at NYU School of Law; and Robert J. Jackson Jr., professor of law at NYU.

FINRA declined to comment and the SEC did not respond to a request for comment about the paper.

The problem of recidivism is certainly not new. A 2016 research paper by the National Bureau of Economic Research said: “Some firms employ substantially more advisers with records of misconduct than others. More than one in seven financial advisers at Oppenheimer & Co., Wells Fargo Advisors Financial Network, and First Allied Securities,” part of Cetera Financial Group’s network, “have a record of misconduct.”

“At Wells Fargo Advisors Financial Network (FiNet), our due diligence recruiting process helps us find and vet the best advisors in the industry to affiliate with us and who are committed to serving their clients’ best interests,” the company said on Friday.

“A number of that study’s conclusions appeared to be flawed as they related to Wells Fargo Advisors Financial Network,” Wells Fargo added. “We believe their model overstates the level of relevant misconduct, including allegations related to declines in value due to volatility or infractions completely unrelated to the advisors’ professional responsibilities.” Oppenheimer could not be reached for comment and Cetera did not immediately respond to a request for comment.

(Photo: Adobe Stock)

— Check out Why This Firm Doesn’t Shy Away From Advisors With Red Flags on ThinkAdvisor.


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