Wall Street Brokers Are Even Worse Than I Thought

Kristin Orman By Kristin Orman
Research Analyst, The Oxford Club

Market Trends

Wall Street’s rogues have been running rampant for years. But this week, I found out the problem is worse than I thought. Fifty-six percent of American households use a financial professional to help them manage their money. With $30 trillion at stake, investors should sit up, take notice and, most importantly, take action.

Living and working on Wall Street in New York City and in South Florida, I have run into more than my fair share of questionable brokers. In fact, so many Wall Street rogues have crossed my path that my friends and I created a game. We called it “Extreme BrokerChecking.”

BrokerCheck is FINRA’s database of registered brokers and brokerage firms. Its reports will tell you if a broker or firm has ever been registered with FINRA, the broker’s work history, and information about customer complaints, regulatory actions and criminal convictions. When a broker’s record is “clean,” the report is fewer than 10 pages long. If not… well, the report is much, much longer.

The objective of “Extreme BrokerChecking” is to find the longest broker report with the most serious disclosures and allegations. Over the years, I have run across some doozies…

One report I pulled was more than 100 pages long and included allegations of committing outright fraud and churning a family member’s account. Unbelievably, that broker was still employed at the time.

The sad part? Now I know he was not an exception, nor did he simply slip through the cracks.

Wall Street is buzzing about the results of a new study from the University of Chicago and the University of Minnesota. The study found that 7% of active advisors have been disciplined for misconduct or fraud. And more than 38% of those who engaged in misconduct have done so more than once.

There Are a Lot of Shady People Where It’s Sunny

When you break it down geographically, broker behavior is even poorer. I have said it before; there are a lot of shady people where it is sunny.

Five of the 10 counties with the highest percentage of brokers with misconduct records are in Florida. The study found that 18.11% of brokers in my backyard of Palm Beach, Florida, have engaged in misconduct. That’s 2.5 times the national average.

The list below shows that bad brokers are attracted to areas with high concentrations of elderly residents and money.


Birds of a Feather Flock Together

More surprisingly, 73% of disciplined brokers are still working in the industry and handling customer accounts a year after they were disciplined. More than half are still employed by the same firm. Moreover, 44% of those who leave find a new home at a new firm within a year.

That’s a scary statistic for investors because brokers with just one mark on their license are five times more likely to commit another act of misconduct.

Many financial firms are enabling bad behavior by keeping and hiring brokers who engage in the misconduct – and some firms employ more disciplined brokers than others. And it’s not just the small firms. Many of the big boys employ these rogues at an alarmingly high rate too.

Oppenheimer & Co. was found to be the worst offender. Nearly 20% of advisors employed by the firm have been reprimanded by FINRA. At Wells Fargo and UBS, the number is over 15%. Clearly some firms are more permissive of bad behavior than others.


Due Diligence Is Key

The results of the study highlight, once again, how important it is for investors to perform their due diligence to vet not only their current and prospective brokers, but the firms they work for as well. FINRA’s website and an Internet search are good places to start.

In the case of broker behavior, past performance often predicts the future. But not always.

Of course, the only surefire way to ensure you don’t become a victim is to manage your money yourself.

Good investing,