In an academic study prepared by researchers from the University of Chicago and the University of Minnesota, brokerage firms were rated based on the percentage of their advisors with disciplinary actions (advisor misconduct) by FINRA, the industry’s self-governing organization. Overall, 7% of advisors have been disciplined with most firms generally in the 2-10% range and some as high as 20%.
The study found that those firms with higher disciplinary issues tended to cater to unsophisticated consumers in areas with less educated, elderly people – these firms also tended to be more permissive of advisors with disciplinary actions based on whether they were likely to hire advisors that had been disciplined. According to the study, half of the advisors disciplined leave their firm within 12 months but 44% land with another firm the next year though at lower compensation.
The DOL’s pending conflict of interest rule is aimed at advisor misconduct. In fact, the White House’s Council of Economic Advisers published a study last year estimating that so-called conflicted advice costs savers $17 billion a year in additional fees and costs.
Though the DOL’s normal purview is ERISA including defined contribution (DC) plans, their pending rule conflict of interest rule would affect advisors working on IRA rollovers. A growing percentage of advisors working on DC plans are acting as fiduciary and tend to be more experienced than advisors working on IRAs (see research the DC plan advisor market). It seems like the DOL is looking to extend the protection and oversight that investors enjoy in the DC plan to their IRA rollovers.
It’s really important to note that companies and investors hire individual advisors, not the entire firm but it’s also important to realize that consumers and companies depend on those firm to police and discipline their advisors where necessary. Working with firms that have fewer incidents of advisor misconduct may indicate a culture and process that would make it more attractive and safer for consumers.
