There are many types of misconduct that brokers and financial planners may engage in, such as churning, rebating, trading on inside information, promising false returns on capital and commingling client funds with personal money. Those who get caught in these schemes can face fines, suspension, revocation of licensure and other sanctions.
But what happens to brokers and planners in the industry after they are disciplined? The answer that came from a study conducted by a team of professors from the University of Chicago and the University of Minnesota might surprise you.
Read on for what happens to many dishonest brokers — knowing about it may help you steer clear of hiring one for yourself or for your practice. (For related reading, see: Is Your Broker Ripping You Off?)
The Truth About Lawbreakers
The study clearly shows that brokers who were disciplined for their actions often had little trouble finding another job. The research focused on brokers who were registered with FINRA, the self-regulatory agency for brokers and planners and their companies who sell securities for a commission. It revealed that 44% of brokers who were registered with FINRA found another job within a year of being fired from their previous position. And since only about half of brokers and planners who become subject to disciplinary actions or proceedings lose their jobs, this ultimately means that about three-quarters of all brokers or planners who are disciplined in some fashion will be working in a similar or identical position a year from that time.
The study based its findings on the history of discipline and employment in the FINRA database going back ten years. It classifies disciplinary action as a case that was definitively determined and settled and was not dismissed or where the outcome is still pending. The violations that were committed in these cases include unsuitable investment recommendations, trading without proper client authorization, negligence and omission of material information to clients, companies or regulators. (For related reading see: Ethical Standards You Should Expect From Financial Advisors.)
It should be noted that the study does not cover registered investment advisors (RIAs) who are registered directly with the SEC or state governments and who do not answer to FINRA. The study shows that about 7% of all securities licensed financial professionals have some sort of disciplinary history, and many of those who do are concentrated in places such as Palm Beach, Fla., and Monterey, Calif. The highest concentration of brokers with disciplinary histories is in Madison County near Syracuse, N.Y., where nearly one-third of all securities licensed personnel had blemished records. Brokers with checkered pasts can be found across the board at big firms as well as at smaller retail firms that use independent broker-dealers.
Do Your Homework on Advisors
Consumers need to do background checks on the brokers and planners that they're thinking of working with before hiring them, but many fail to do so. Those who do research often fail to use the right search tools. "We strongly recommend that individuals themselves use BrokerCheck, which is where the researchers got their data,” said Ray Pellecchia, a spokesman for FINRA. (For related reading, see: What Fees Do Advisors Charge? and Is Your Advisor Looking Out for Your Best Interests?)
There, brokers can be found using a name search or CRD number, which the broker must furnish to clients and prospects upon request. Those who are registered with the SEC and not FINRA can also be found using this database, as it will automatically redirect users to the SEC site if necessary. BrokerCheck will not only show whether a broker has been subject to disciplinary action, but it will also list all firms at which brokers have been employed during the last 10 years, the states in which they are licensed to do business, and when they took any licensing exams and whether they passed them.
The CFP Board of Standards also has a search feature on its website that allows consumers to do background checks on all CFP credentialed practitioners. This will turn up any securities or insurance-related infractions that were committed by the practitioner as well as any violations of the CFP rules or code of ethics, which holds designees to a higher standard of conduct than FINRA or the SEC. Consumers can also check out the disciplinary histories of insurance licensees by calling their state insurance commissioner, who will have similar records of all infractions committed by licensed personnel.
The Bottom Line
It's not hard to find out whether or not a broker or financial planner has a shady past, though it might be surprising to learn how fast and easy it is for many disciplined brokers to get back to work advising clients. A quick, free online search will tell consumers everything they need to know, including disciplinary and employment histories and the scope of a broker's licensure. Be sure to do your homework before hiring anyone to advise you financially or to join your practice. (For related reading, see: Ethical Issues for Financial Advisors.)