Advisor Misconduct: How Widespread?

But, asks Matvos, if such figures are overstated, doesn't that then mean the percentage figures for disclosures and misconduct "are too low?"

"I get it that there are mistakes in the methodology," said Chip Roame, head of Tiburon Strategic Advisors, who nonetheless believes the study needs to be taken seriously and shouldn't be dismissed by the industry over data concerns.

"The retail versus institutional distinction is important, and penalizes independent broker-dealers and big retail firms, while making institutional firms look better," he explained in an interview.

Furthermore, complaints and even settlements "are not necessarily proof of bad actors," Roame states. "And the study also excluded RIAs, an industry that positions itself as holier than thou but also may have generated the [Bernie] Madoffs, [Allen] Stanfords, etc."

Several firms, which declined to comment specifically about data that referred to them, believe that settlements between advisors, firms and clients do not prove misconduct and should not have been included in the study's statistics. In other words, the settlements were reached to put an end to a conflict but do not necessarily represent "guilt" tied to misconduct.

"It would be helpful to have a study — one without any questions about its methodology — that would shine a spotlight on firms that routinely hire advisors with proven records of misconduct," said Elzweig. The size of settlements or awards could be used to distinguish between serious offenses and cases in which a firm paid off a plaintiff just to avoid more costly litigation."

Nonetheless, the study finds that the median settlement tied to misconduct from 2005 to 2015 was $40,000.

"That's not chunk change," said Matvos. "And looking at the top 25% of settlements, we are talking about a median of over $120,000 — not just nuisance lawsuits." The study also argues that some firms seem to foster, or at least tacitly accept, a culture that puts up with misconduct — an argument that many firms vehemently dispute. "Our findings suggest that some firms specialize in misconduct and cater to unsophisticated consumers, while others use their reputation to attract sophisticated consumers," the authors explained.

For its part, Oppeheimer says it "has made significant investments to proactively tackle risk and compliance issues in our private client division." For instance, it appointed a new global compliance officer and added over 20 staff members to its compliance and audit teams.

"Oppenheimer recognized the need to address these legacy issues head on, and we are confident that we have put in place safeguards to ensure that our advisors and other employees meet the highest ethical standards," it explained in a statement.

Worthwhile Research?

Roame believes the industry needs to reflect — and act — on what the researchers present. "The study should be taken seriously, and the industry should set out to fix itself," the consultant said. "Sure, the data has flaws, and one should be careful analyzing the individual firm data. But the broad industry conclusions are accurate."

Parsing this data is difficult, Roame explains, since it involves making plenty of assumptions. "But the bottom line is that the industry has a lot of bad actors and a high misconduct rate," he said.

Rather than deflecting attention from the study's broader points — which is "counter to public good," Roame argues — "admit it and weed [the bad actors] out." (He also hope the authors will "clean up" their data so the industry can move ahead on the issue.)

The report, says Matvos, has "a lot in it," including research about repeat offenders, which account for some 33% of advisors with misconduct records.

And this finding cuts across all types and sizes of firms: "Differences between them do not come into play at all," he said.

Also noteworthy is what happens to advisors after misconduct is dealt with: 48% of advisors leave the firm but only 27% leave the industry. "In some ways that tells you firms are pretty active about addressing misconduct overall. But what about firms that hire those advisors after misconduct. What is going on there?"

SIFMA is concerned the study does not adequately highlight steps being taken in the industry today to curb misconduct. "We believe the report fails to properly explain the process used by one regulator, FINRA, which reviews all disclosure filings and initiates enforcement proceedings or statutory disqualification proceedings as appropriate to properly penalize the small minority of registered representatives who engage in true sales practice misconduct," the group said.

Matvos admits that the study's research "just scratches the surface." And its value is in revealing "incredibly rich data, which [are] publicly available. It's an area we should have more facts on, and that is why we did the research," he said. "It is useful to know."