FINRA spokesman Ray Pellechia noted in an e-mail that while the organization hasn't had time to review the working paper, addressing the culture of securities firms is one of FINRA's top priorities. The regulator "keeps close tabs on potentially high-risk registered persons—and the firms that hire them," Pellechia said. In 2015, he noted, FINRA permanently barred nearly 500 individuals and 25 firms from the industry. Not all disclosures indicate regulatory problems; for example, Pellechia said, an arbitration complaint that has been dismissed is still disclosed in the database.
Many cases of misconduct arose around the issue of the "suitability" of investments. That would mean, for instance, that an advisor should not suggest that a 75-year-old client put most assets in a high-fee, aggressive-growth mutual fund. Often, the report found, investments involved in reported misconduct cases were insurance products.
Previous studies have raised concerns over conflicted retirement planning advice from financial advisors. Last year, for instance, the President's Council of Economic Advisors sounded the alarm on bad advice without describing it as an issue of misconduct. "Right now," its report warned, "your financial advisor—someone who's supposed to be acting in your best interest—can direct you toward a high-cost, low-return investment rather than recommending a quality investment that works better for you." The report found that conflicts of interest by advisors likely led to $17 billion of losses annually for working-class and middle-class families.
Some observers believe conflict issues would be alleviated under a new rule that requires all advisors to act as "fiduciaries" in giving retirement advice—to act in their clients' best interests. Justifying the sale of high-commission products, when there are low-fee alternatives, would become difficult. The rule, which came out of the Department of Labor, has been wending its way through the political process.
One reason why advisors with misconduct records stay in business is a lack of consumer sophistication. "Misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations and high incomes," the report states. The study's findings "suggest that some firms 'specialize' in misconduct and cater to unsophisticated consumers."
Since all this advisor data is public, Seru says he is surprised it took so long for someone to do this kind of study. His next project will look at whether greater disclosure efforts in the financial-advisor industry, such as BrokerCheck, help spark better governance.