By Kevin Carroll
In any profession, and especially in the financial services industry, misconduct regarding the treatment of clients is unacceptable. That’s why it’s important to correct the record with respect to a new report, “The Market for Financial Adviser Misconduct,” which makes overly broad and inflated claims regarding the level of misconduct among financial advisors.
SIFMA member firms and their regulators employ rigorous rules, supervision, exam and disciplinary programs and employ robust surveillance systems to protect investors from the small number of financial advisers who behave improperly. As a result, the overwhelming majority of financial services professionals, be they brokers or investment advisers, operate in good faith, do not have any disciplinary record, and provide excellent service to and are trusted and valued by their clients.
The Report’s claim that 7% of all advisors have misconduct records is a misleading number. In order to understand the shortcomings of this Report, it’s important to understand the source of the Report’s data: FINRA’s BrokerCheck database. BrokerCheck is a public database that compiles all complaints made against an advisor. Some of these complaints are dropped or dismissed as without merit, and others are arbitrated, resulting in an award for the customer. But the majority of all customer complaints – about 60% of them – are resolved by settlement.
The Report unfairly and improperly infers adviser “misconduct” with respect to every one of these settlements. Both parties have their own incentives to settle. Cases frequently settle in order to save time and money, to reduce risks and exposure, and to ensure finality.
Many if not most cases settle for reasons having nothing to do with alleged “misconduct.” For example, following the 2008 financial crisis, a significant number of customer claims were brought based on declines in customers’ stock portfolios, which were in turn caused by broader market-wide declines in asset values during the crisis. Indeed, the Report’s own Figure 3 (at page 48) shows a spike in “misconduct over time” surrounding the financial crisis and its aftermath. Many of these cases settled.
Even among customer claims that resulted in an award for the customer, many of these cases relate to “product” failures that do not necessarily implicate advisor conduct (e.g., Puerto Rican bonds, auction rate securities, Fannie/Freddie preferreds, Lehman structured notes, etc.). In these cases, the claim is more closely tied to the downside risks of the particular product, rather than the quality of advice or service provided by the financial advisor. Poor performing products such as these and others accounted for a significant volume of the cases arising out of the 2008 financial crisis.
BrokerCheck also includes disclosures about an advisor’s civil and criminal record, regulatory actions, and employment separations after allegations. The Report also counts all of these disclosures as “misconduct,” which is questionable. In many instances, these disclosures relate to violations of law or rules (or in the case of employment separations, mere accusations) that do not relate to the advisor’s retail sales practices at the firm, and that do not involve the advisor’s retail clients.
Moreover, the Report counts as “advisors” all of the six-hundred and forty thousand plus individuals who are registered with FINRA. Yet, among this group, less than half are Series 7 licensed, client-facing, financial advisers. The rest serve as traders, or investment bankers, or in compliance, legal, operations, or other functions within the firm, that do not involve direct interface with, or providing personalized investment advice to, retail clients.
The Report significantly overstates the level of misconduct across the industry by counting all settlements, product cases, certain mere allegations, and disclosure events that may have nothing whatsoever to do with sales practices or retail clients. Regardless, the Report goes on to level the outrageous accusation that certain firms’ business models “specialize in misconduct.” The Report has no reasonable basis for this sensational charge. It’s simply not the kind of conclusion that flows logically from a dispassionate and rationale examination of data. Rather, it seems to suggest an anti-industry bias.
Finally, the Report fails to explain the process followed by FINRA and other securities regulators to review disclosure filings and initiate enforcement proceedings or statutory disqualification proceedings as appropriate to properly penalize the small minority of financial advisors who engage in true sales practice misconduct. The Report fails to properly credit our fairly well-functioning regulatory regime, and the diligence, care and hard work that our members and their financial advisors put in every day to protect their clients and help them achieve their financial goals.
To reiterate, we agree that misconduct by financial advisers towards investors should not be tolerated. We want to get it right, and so we welcome the study of our industry. But the study has to get it right too, and this one missed the mark on some key points.
