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| Is Your Stockbroker Troubled? Here’s One Way to Find Out | Is Your Stockbroker Troubled? Here’s One Way to Find Out |
| (about 1 hour later) | |
| With the news this week that professionals who invest your retirement money will soon have to do so with your best interests in mind, many people may go shopping for a stockbroker to help them manage their life savings. | With the news this week that professionals who invest your retirement money will soon have to do so with your best interests in mind, many people may go shopping for a stockbroker to help them manage their life savings. |
| But anyone who does (or has already) ought to examine a working paper that three professors released last month. Here’s some of what they found: | But anyone who does (or has already) ought to examine a working paper that three professors released last month. Here’s some of what they found: |
| • Among brokers employed from 2005 to 2015, 7.28 percent had at least one disclosure in their industry records for a settled consumer complaint or worse. | • Among brokers employed from 2005 to 2015, 7.28 percent had at least one disclosure in their industry records for a settled consumer complaint or worse. |
| • Many household-name firms have double the percentage of brokers with such marks, with Oppenheimer topping the list at 19.6 percent. | • Many household-name firms have double the percentage of brokers with such marks, with Oppenheimer topping the list at 19.6 percent. |
| • Five of the 10 counties with the highest percentage of brokers with disclosures are in Florida. | • Five of the 10 counties with the highest percentage of brokers with disclosures are in Florida. |
| To spot-check these figures, I looked up all 50 Oppenheimer brokers within 25 miles or so of Palm Beach. Seventeen of them — or 34 percent — had spotty records, and some had nine or 10 things to disclose. Then I called them all and tried to ask them how they would advise readers to evaluate their records. The company acknowledges that it has some work to do. | |
| Before we get there, however, let’s stop and talk about this data, where it comes from and some of the assumptions the researchers made. | Before we get there, however, let’s stop and talk about this data, where it comes from and some of the assumptions the researchers made. |
| The brokerage industry is unique, or nearly so, in that there is an easy way for consumers to look up and read about many of the problems that its employees have had in the past. That happens through a website called BrokerCheck maintained by Financial Industry Regulatory Authority, the nongovernment industry regulator known as Finra. | The brokerage industry is unique, or nearly so, in that there is an easy way for consumers to look up and read about many of the problems that its employees have had in the past. That happens through a website called BrokerCheck maintained by Financial Industry Regulatory Authority, the nongovernment industry regulator known as Finra. |
| When customers get into disputes with their brokers, the results of any formal proceedings (often arbitration in this industry, as in so many others) generally end up in BrokerCheck. So do any penalties from regulators or others. If the broker has been fired for cause, this, too, will generally show up, as will any personal tax liens on brokers or bankruptcies that they’ve filed. | When customers get into disputes with their brokers, the results of any formal proceedings (often arbitration in this industry, as in so many others) generally end up in BrokerCheck. So do any penalties from regulators or others. If the broker has been fired for cause, this, too, will generally show up, as will any personal tax liens on brokers or bankruptcies that they’ve filed. |
| Any of these items results in what the database refers to as a disclosure. A disclosure is not evidence of wrongdoing in and of itself, because there are disclosures even when a customer brings a complaint and arbitrators dismiss it. Still, any disclosure ought to give a customer or potential customer pause. | Any of these items results in what the database refers to as a disclosure. A disclosure is not evidence of wrongdoing in and of itself, because there are disclosures even when a customer brings a complaint and arbitrators dismiss it. Still, any disclosure ought to give a customer or potential customer pause. |
| So now come our academics, Mark Egan of the Carlson School of Management at the University of Minnesota and Gregor Matvos and Amit Seru of the Booth School of Business at the University of Chicago. Professor Matvos said that the trio had not pursued the research with any particular thesis or agenda, just curiosity when they realized that they could run industrywide numbers. “If you told us we’d have 1 percent, that would have been reasonable to me,” he said. They ended up with 7.28 percent. He said he was surprised by the number of repeat offenders. | So now come our academics, Mark Egan of the Carlson School of Management at the University of Minnesota and Gregor Matvos and Amit Seru of the Booth School of Business at the University of Chicago. Professor Matvos said that the trio had not pursued the research with any particular thesis or agenda, just curiosity when they realized that they could run industrywide numbers. “If you told us we’d have 1 percent, that would have been reasonable to me,” he said. They ended up with 7.28 percent. He said he was surprised by the number of repeat offenders. |
| The analysis relied on a particular definition of “misconduct.” To them, it is fair to describe settled consumer complaints as misconduct. After all, the median settlement amount that aggrieved consumers receive is $40,000, which would pay for a lot of a lawyer’s time to defend an innocent broker. A quarter of the settlements exceed $120,000, though settlements generally include boilerplate language about not having admitted or denied wrongdoing. | The analysis relied on a particular definition of “misconduct.” To them, it is fair to describe settled consumer complaints as misconduct. After all, the median settlement amount that aggrieved consumers receive is $40,000, which would pay for a lot of a lawyer’s time to defend an innocent broker. A quarter of the settlements exceed $120,000, though settlements generally include boilerplate language about not having admitted or denied wrongdoing. |
| Industry representatives find this definition of misconduct absurd. “Both parties have their own incentives to settle,” wrote Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association, in a blog post about the paper. “Cases frequently settle in order to save time and money, to reduce risks and exposure, and to ensure finality. Many if not most cases settle for reasons having nothing to do with alleged ‘misconduct.’” Plus, plenty of investors with buyer’s remorse blame their brokers, even when they signed off on risky investments themselves, especially in the wake of the stock market meltdown in 2008 and early 2009. | Industry representatives find this definition of misconduct absurd. “Both parties have their own incentives to settle,” wrote Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association, in a blog post about the paper. “Cases frequently settle in order to save time and money, to reduce risks and exposure, and to ensure finality. Many if not most cases settle for reasons having nothing to do with alleged ‘misconduct.’” Plus, plenty of investors with buyer’s remorse blame their brokers, even when they signed off on risky investments themselves, especially in the wake of the stock market meltdown in 2008 and early 2009. |
| Professor Matvos said he still believed that the trio’s definition of misconduct was conservative. He added that even when brokers have a complaint that is dismissed or dropped, that is still predictive of future problems. And brokers who do have disclosures for misconduct, by the professors’ definition, are five times as likely, on average, to end up with similar marks on their records in the future than all other brokers. (The other broker disclosures that meet the professors’ definition of misconduct are regulatory actions, a job change after an allegation, customer disputes with actual awards and completed civil actions.) | Professor Matvos said he still believed that the trio’s definition of misconduct was conservative. He added that even when brokers have a complaint that is dismissed or dropped, that is still predictive of future problems. And brokers who do have disclosures for misconduct, by the professors’ definition, are five times as likely, on average, to end up with similar marks on their records in the future than all other brokers. (The other broker disclosures that meet the professors’ definition of misconduct are regulatory actions, a job change after an allegation, customer disputes with actual awards and completed civil actions.) |
| It’s also possible that the researchers are undercounting misconduct. Many customers have no idea that their brokers are working them over, and others never report it if they do figure it out. Some brokers manage to strip their BrokerCheck files clean through a process called expungement. And the researchers acknowledge that their numbers for some firms may include many people registered with Finra who don’t have any customer access, thus skewing the data, since no customer would ever complain about them. They hope to address this in future updates to the paper. (Another confusing part of the paper is that different branches of the same parents, including UBS and Wells Fargo, show up at both the top and bottom of the misconduct lists.) | It’s also possible that the researchers are undercounting misconduct. Many customers have no idea that their brokers are working them over, and others never report it if they do figure it out. Some brokers manage to strip their BrokerCheck files clean through a process called expungement. And the researchers acknowledge that their numbers for some firms may include many people registered with Finra who don’t have any customer access, thus skewing the data, since no customer would ever complain about them. They hope to address this in future updates to the paper. (Another confusing part of the paper is that different branches of the same parents, including UBS and Wells Fargo, show up at both the top and bottom of the misconduct lists.) |
| But whatever the correct definition of misconduct, down in Florida, Oppenheimer’s roster of brokers would raise most reasonable people’s eyebrows. Most of the professionals there with disclosures have more than one. One person who recently left the firm had a no-contest plea for felonious assault on his record. | But whatever the correct definition of misconduct, down in Florida, Oppenheimer’s roster of brokers would raise most reasonable people’s eyebrows. Most of the professionals there with disclosures have more than one. One person who recently left the firm had a no-contest plea for felonious assault on his record. |
| Michael Sandberg, a 26-year industry veteran, has 10 disclosures, including seven settlements and a $10,000 fine from 2005 for frequent buying and selling of mutual fund shares in client accounts. Charles Shalmi, who has been in the business for 31 years, has nine disclosures, including a decade-old two-year revocation of his ability to sell securities in Illinois. Neither man responded to messages seeking comment and none of their colleagues with pockmarked records would talk to me on the record either. | Michael Sandberg, a 26-year industry veteran, has 10 disclosures, including seven settlements and a $10,000 fine from 2005 for frequent buying and selling of mutual fund shares in client accounts. Charles Shalmi, who has been in the business for 31 years, has nine disclosures, including a decade-old two-year revocation of his ability to sell securities in Illinois. Neither man responded to messages seeking comment and none of their colleagues with pockmarked records would talk to me on the record either. |
| Does Oppenheimer have specific standards for who it’s willing to hire and retain? Yes, according to the company, but they are proprietary. In a statement, the company said that it had replaced the branch manager in Boca Raton, Fla. It added that it was also making “sweeping” changes to its team of brokers there and had already asked “a number” of them to leave. | Does Oppenheimer have specific standards for who it’s willing to hire and retain? Yes, according to the company, but they are proprietary. In a statement, the company said that it had replaced the branch manager in Boca Raton, Fla. It added that it was also making “sweeping” changes to its team of brokers there and had already asked “a number” of them to leave. |
| Oppenheimer also has a new chief compliance officer, Doug Siegel. In an interview, he said that he knew the firm’s reputation when he began the job and that the professors’ study had become part of his assessment. What would he have consumers make of the 19 percent misconduct figure for the firm over all or the 34 percent figure in Florida? “Coming to a conclusion based on big statistical analyses is difficult,” he said. | Oppenheimer also has a new chief compliance officer, Doug Siegel. In an interview, he said that he knew the firm’s reputation when he began the job and that the professors’ study had become part of his assessment. What would he have consumers make of the 19 percent misconduct figure for the firm over all or the 34 percent figure in Florida? “Coming to a conclusion based on big statistical analyses is difficult,” he said. |
| He’s right about that. After all, 80 percent of Oppenheimer’s brokerage force has a clean record, and many of them would no doubt do right by consumers. The new fiduciary rule — and ever-increasing compliance efforts at Oppenheimer and elsewhere in the industry — will probably help some. | He’s right about that. After all, 80 percent of Oppenheimer’s brokerage force has a clean record, and many of them would no doubt do right by consumers. The new fiduciary rule — and ever-increasing compliance efforts at Oppenheimer and elsewhere in the industry — will probably help some. |
| Still, you cannot be too wary when turning your money over to a financial professional. If you or your relatives are in Florida or your broker is, it sure seems that you need to be especially careful. The researchers note that in general, brokerage customers who are older, less educated and wealthier tend to end up in trouble most often. | Still, you cannot be too wary when turning your money over to a financial professional. If you or your relatives are in Florida or your broker is, it sure seems that you need to be especially careful. The researchers note that in general, brokerage customers who are older, less educated and wealthier tend to end up in trouble most often. |
| If your broker does have disclosures (and you should check every year or so for new ones that may have popped up), ask some questions. If the response is defensive, that ought to tell you something. If brokers don’t like answering your inquiries, perhaps they ought to work in an industry where there isn’t as much disclosure. | If your broker does have disclosures (and you should check every year or so for new ones that may have popped up), ask some questions. If the response is defensive, that ought to tell you something. If brokers don’t like answering your inquiries, perhaps they ought to work in an industry where there isn’t as much disclosure. |
| If the response is unintelligible, keep pressing. If the brokers have gotten in trouble for pushing complex products that you (or they) don’t understand, then that is a significant sign as well. The money management industry is much too complicated, and it’s not your job to translate the gibberish that some of its salespeople spew. | If the response is unintelligible, keep pressing. If the brokers have gotten in trouble for pushing complex products that you (or they) don’t understand, then that is a significant sign as well. The money management industry is much too complicated, and it’s not your job to translate the gibberish that some of its salespeople spew. |
| For any of these conversations to happen, however, you have to dive into BrokerCheck in the first place. It takes 60 seconds. Do it right now; you’ll find links to the records of many financial planners in there as well. | For any of these conversations to happen, however, you have to dive into BrokerCheck in the first place. It takes 60 seconds. Do it right now; you’ll find links to the records of many financial planners in there as well. |
| Too many people do not do this, which is a source of endless frustration and sadness to people like Professor Matvos. “Despite the information being out there, the most vulnerable people don’t know that it’s there,” he said. “The big puzzle we face is how do we get those people to use the information at their disposal?” | Too many people do not do this, which is a source of endless frustration and sadness to people like Professor Matvos. “Despite the information being out there, the most vulnerable people don’t know that it’s there,” he said. “The big puzzle we face is how do we get those people to use the information at their disposal?” |