May 3, 2016

Financial Adviser Misconduct

Just as we trust our doctors to keep our bodies healthy, many of us turn to financial advisers and brokers to keep our financial bodies healthy. But recent research reveals that misconduct is epidemic among financial advisers. About 1 out of every 13 financial advisers has committed some type of “misconduct” in their career, and misconduct is far more likely with brokers who have a previous record.

Misconduct among financial advisers doesn’t only impact the adviser – it also has a tremendous impact on their firm, as the firms are often the ones paying the settlements that result from complaints and disputes. The median settlement is $40,000, and the industry pays out more than $500 million every year in settlements due to misconduct. For companies like Oppenheimer & Co., almost 20% of their advisers have a history of misconduct.

Understanding the Problem

This problem stems from two primary issues. The first is that repeat offenders face little consequence and are thus five times more likely to have problems in the future. The second is that certain firms are failing to use measures to discourage the misconduct.

Repeat Offenders

The problem of repeat offenders is often a staffing problem. Comparing Oppenheimer & Co. to Morgan Stanley & Co., you can see a huge difference in the employment of repeat offenders. Whereas Oppenheimer has 19.6% of their advisers with a history of misconduct, Morgan Stanley has less than 1% of their advisers with the same history. There is some evidence to indicate that financial advisers who are fired or leave their firm after an ethical lapse get hired at lower rates than advisers without that troubling background, so the new firms are often scraping the bottom of the barrel and coming up with the dregs of the financial adviser industry.

Firms with clear policies about financial adviser misconduct have lower rates of misconduct, and firms that steer away from hiring advisers with a history of misconduct are less likely to have problems with their team. This isn’t just a reputation issue, but a financial one. Recall that in most cases, the settlements paid out due to misconduct are paid from the coffers of the firm, not the financial adviser.

Company Deterrents

In addition to a company policy with clear instructions regarding ethical guidelines, companies can reduce the number of misconduct reports significantly through adequate training. Companies that provide greater amounts of training to their financial advisers have fewer reports of misconduct.

What are the biggest issues?

Financial misconduct makes up a large portion of the misconduct reports, with about 42% of misconduct reports containing unauthorized activity, fee/commission problems, fiduciary duty, risky investments, or churning. In many cases, these issues can be reduced or eliminated through better training and oversight of financial advisers.

37.19% of the complaints had to do with misrepresentation, fraud, or omission of key facts. These issues are also related to poor training of advisers, but they may also have to do with poorly designed marketing materials, plan brochures, and other related documentation.

It’s important to note that the biggest category for misconduct were insurance (about 14%) and annuities (about 8.5%). This may be related to two key points: first, that financial advisers aren’t receiving enough training and marketing assistance on insurance and annuities; second, that insurance and some annuities are regulated through state regulatory agencies as well as through FINRA, which may result in more complaints in these areas. Customers may be more likely to complain to their state’s OIC than to FINRA or the SEC.

What is neglected?

Financial advisers are expected to be proficient in the rules and regulations pertaining to marketing and selling their products and services. They are expected to know the details of what they’re selling, so better product knowledge might help to reduce some of the complaints. But as companies continually change their product offerings, it can be hard for an adviser to stay abreast of all the changes.

But marketing education is perhaps the most neglected area of financial adviser training and education. Continuing education tends to cover things like ethics and regulatory changes, but little guidance is given to advisers about how to effectively build their business. The best practice is to pair new financial advisers with a mentor, and to provide information and tools to help financial advisers with their marketing and advertising.

My Thoughts

I (Holly Antle) am not a financial adviser, but I am an insurance agent. In many ways, there are marked similarities in the two industries, but I’m sure that there are differences that I’m scarcely aware of.

When I first began as an insurance agent, I began with a company that had a history of hiring newbies and provided a lot of training and marketing tools for their agents. We were taught how to prospect, given scripts for selling, and provided with a training director and a personal mentor. But even with that level of support, starting a new business as a new insurance agent wasn’t easy. In my regional training classes, we had 16 people in the first class I attended. A month later when we met for our second class, we had 14 agents remaining, and only one of those agents had written a single policy. By the third month, there were only 6 agents left and only two had written any business at all – one agent had written three policies and the other had written only one. While this is purely anecdotal, in my own class, there were 14 people who started that class and didn’t earn a penny for at least three months.

If I had been one of the agents who didn’t earn a penny, even I might have been tempted to break the rules so I could finally get a paycheck! Desperation can lead insurance agents and financial advisers to make questionable decisions. And in the financial adviser world, an adviser who makes questionable decisions can cost their parent company an awful lot of money.

What Advisers Need: the Four T’s

If you’re going to reduce or prevent misconduct in your company, you need to provide your advisers with the tools they need to make a good living. If you can reduce desperation and take good care of your advisers, they’ll be less likely to push ethical boundaries.

Advisers need their companies to provide them with the four T’s:

  • Training
  • Tactics
  • Tutelage
  • Tools


Financial advisers – even experienced ones – need training. They need regular training on regulatory changes, product changes, and marketing techniques. While your company may be training your advisers on regulatory changes and changes to the product lineup, are you providing regular training in sales and marketing? Your advisers need sales training. New advisers need help with basic sales training, but it’s important that even experienced advisers receive regular ongoing training to help them keep their business strong.


Your advisers need solutions to help them close the sale. Part of this is training, but another part is giving them ideas and inspiration to do things like overcome objections and answer questions. Giving them sales tactics will help them have more confidence in their sales ability, and this will lead them to close more sales.


All advisers need some sort of mentorship, but especially new advisers. Unfortunately, the level of tutelage provided in most cases is minimal. An experienced adviser might be assigned as a mentor, but that experienced adviser is taking his or her time to support the student and is probably losing money as a result of it. Provide your mentors with good incentive to provide good tutelage so that they’re motivated to pay attention and help the new advisers.

For experienced advisers, your company may want to consider taking a page from the medical profession. During weekly meetings, you can ask advisers to submit problems or questions and use a roundtable to brainstorm ideas with other agents. When there’s a problem, you can have your advisers put together a presentation on it so that they and the other advisers can learn from their mistakes. This falls into the realm of ongoing training, but it also helps build relationships between your advisers so that they’re motivated to do their best for their team.


If you don’t give your advisers the tools they need, they will find a way to make it work without those tools. It’s not enough to give them a brochure or a pamphlet. Consider the ways that they market their business, and ask your advisers what tools they need or what tools they’re making up for themselves. Here are a few ideas to discuss:

  • Telephone scripts for cold calling or follow-up calls
  • Social media posts that they can share
  • Newsletters they can use with minor customizations
  • Email marketing
  • Thank you notes they can send to new clients
  • Sales scripts and presentations

If you give them some creative marketing tools, they’ll be less likely to make up their own, and if they’re making it up as they go, they’re going to be more likely to break the rules than if you give them the right words to say.

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