McCann said his research on bad brokers, which dates back two decades, shows that instead of leaving the industry, bad apples are often re-employed at lower compensation and by less prestigious firms, than brokers who do not have customer complaints.
“Rather than weeding bad brokers out of the industry, the regulatory environment and labor market sifts bad brokers down the quality ladder over time into brokerage firms with loose hiring practices and law compliance ethics and these bad brokerage firms specialize in preying on unsophisticated investors,” McCann added.
SLCG’s founder says the secrecy surrounding Finra data and the amount of data that Finra expunges on firms’ and brokers’ disciplinary history made this research a “Herculean effort.”
“We have moved significantly closer to a first-best ranking by using information on BrokerCheck reports which identifies the employing firm where the complaint about conduct occurred. It’s a significant improvement over the firm’s previous rankings, but our current measure still misses cases which have been expunged,” McCann says. Arbitration “panels have wiped these cases off brokers’ CRDs and BrokerCheck reports because they found that these firms not the broker were solely responsible, yet they vanish from the public record.”
SLCG hopes its research will spur Finra to release its data so firms such as Lipper and Morningstar can develop methodologies for rating and ranking firms based on their customer complaint track record, McCann said.