The share of American households that rely on financial advisors for investment and savings decisions has increased from 20% in 1995 to 30% over the past three decades. Among those with non-retirement investment accounts, nearly 60% reported using an advisor in 2019, according to a recent study by researchers at Harvard Business School, Northwestern University’s Kellogg School of Management and Stanford Graduate School of Business.
Despite this growth, a widespread perception exists that many advisors are dishonest. And this distrust is warranted, the study says, as about 1 in 15 advisors has a history of serious misconduct, rising to 1 in 6 in certain regions and firms, according to the Financial Industry Regulatory Authority’s BrokerCheck as of January 2024.
In 2016, the researchers ranked firms by the share of advisors with a past record of misconduct. In the most recent study, they found that misconduct rates fell and the top 20 firms, whose names had been published, but remained stable at the next 20 firms, whose names had not.
The study defines misconduct as any criminal or regulatory offenses, customer disputes resulting in a settlement or employment separations following allegations. It says that the measure of misconduct is likely an underestimate: Some misconduct may go undetected or unreported, and cases that are resolved in the advisor’s favor, although not classified as misconduct, may still reflect underlying misconduct.
According to early 2024 data gathered for the study, about 450 firms employed at least 100 financial advisors. At a quarter of firms, less than 2% of advisors had a misconduct record. In contrast, among the top 10% of firms, 18% of advisors had misconduct records, and at the top 1%, this figure rose to 36%.
Here are the 10 firms with the biggest share of advisors with a past record of misconduct as of 2024 among firms that employ at least 1,000 financial advisors:
- Oppenheimer & Co.: 1,851 advisors; 17.02% misconduct rate
- Cetera Advisors: 2,145; 12.96%
- Wells Fargo Advisors Financial Network: 3,111; 12.92%
- Stifel, Nicolaus & Co.: 5,054; 12.41%
- UBS Financial Services: 11,211; 11.94%
- Securities America: 3,161; 11.86%
- Purshe Kaplan Sterling Investments: 1,620; 11.73%
- Janney Montgomery Scott: 1,728; 11.52%
- Cetera Advisor Networks: 4,824; 11.44%
- Osaic Wealth: 5,376; 11.35%
'Naming and Shaming'
The study’s findings suggest that investors’ lack of financial sophistication is a key issue in the prevalence of misconduct in the industry, and that making enhanced disclosure of that misconduct could be an effective policy response.
In a 2016 study, the researchers published a list of the 20 firms with the highest misconduct rates. Major outlets such as Bloomberg and Financial Times published the results. In the months following the flurry of publicity, several firms on the list publicly committed to addressing misconduct.
To establish whether these firms altered their behavior, the researchers designed a study that included the 20 firms on the list and, as a control group, the firms ranked 21 to 40 that also had elevated misconduct rates in 2016 but were not included on the published list.
For each firm in both groups, they calculated the share of advisors with misconduct records at the year-by-firm level using updated BrokerCheck data. They then analyzed how the misconduct rate changed for the listed and control firms from 2011 to 2019, covering four years before and after the public disclosure of the top 20 firms’ misconduct rates.
The results showed that the share of advisors with misconduct records fell by 1.3 percentage points at the firms on the list, while it remained stable at the control group firms. Given that the average misconduct rate at 20 firms had been 12%, this represents a 10% reduction, according to the study.
“Overall, the ‘naming and shaming’ disclosure policy appears to have made the product and labor markets function more efficiently,” the report says.
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