Tuesday, May 10, 2016

Have 1.3% or 7.3% of Stock Brokers Engaged in Misconduct?

By Craig McCann, PhD, CFA , Chuan Qin, PhD and Mike Yan, PhD, CFA, FRM

In our recent working paper How Widespread and Predictable is Stock Broker Misconduct? we reconcile estimates of misconduct, demonstrate that broker misconduct is predictable and explain that ostensibly publicly available BrokerCheck data could be used to help investors avoid bad brokers and bad brokerage firms if only it were made truly public instead of only speciously so.

Jason Zweig's recent column in the Wall Street Journal Is Your Broker Good or Bad? discussed our research problem. In this post and two subsequent posts we boil down our research into these three main topics.

Three recently published research reports have analyzed customer complaints, regulatory actions and other financial disclosures by brokers using FINRA BrokerCheck data. The studies report widely different assessments of the extent of broker misconduct.

In Do Investors Have Valuable Information about Brokers?, Qureshi and Sokobin from FINRA's Office of Chief Economist analyze publicly and non-publicly available BrokerCheck data on 181,133 brokers and find that 2,349 of the brokers registered with four or more states for at least half their careers, or 1.3% of the total studied, had at least one customer complaint during the period from 2000 to 2013 which resulted in an award or settlement above a $10,000 threshold before May 18, 2009 and above a $15,000 threshold thereafter. Thus, it appears from Qureshi and Sokobin, that misconduct is rare in the brokerage industry.

In The Market for Financial Adviser Misconduct, Egan, Matvos and Seru using the BrokerCheck data covering a slightly different time period - 2005 to 2015 - found that that 7.3% of brokers have financial misconduct disclosures on their record and that brokers remain in the industry despite repeated misconduct. Egan, Matvos and Seru use a more expansive definition of broker misconduct than Qureshi and Sokobin, and this explains in part why they find so many more brokers may have engaged in financial misconduct.

In our How Widespread and Predictable is Stock Broker Misconduct? we reconcile such divergent estimates of misconduct. We find that 20,010 or 4.9% of brokers currently registered with 4 or more states have resolved customer complaints which meet Qureshi and Sokobin's definition of investor harm events.

The difference between our results - 20,010 brokers versus 2,349 brokers and 4.9% versus 1.3% of brokers - is thus not as a result of differences in the definition of investor harm. Our results differ primarily because we include brokers registered before 2000 and those brokers who are far more likely to have customer complaints were excluded in the FINRA study.

Our research and Egan, Matvos and Seru find that bad brokers concentrate in bad brokerage firms and the existence of concentrations of bad brokers help predict future misconduct by co-workers not yet revealed to be bad. Thus, avoiding firms with high concentrations of bad brokers is a good start for investors trying to protect themselves from broker fraud.

The following table lists the top 100 brokerage firms with 400 or more registered brokers sorted by the percentage of their brokers associated with investor harm events as defined by the FINRA study as of December 31, 2015.

Company NameRegistered BrokersInvestor Harm RateMisconduct RatePreviously Fired Rate
AEGIS CAPITAL CORP.44424.10%35.14%4.73%
SUMMIT BROKERAGE SERVICES, INC.67619.08%30.92%9.62%
NATIONAL SECURITIES CORPORATION76018.03%31.58%5.53%
CENTAURUS FINANCIAL, INC.60216.28%27.74%6.48%
INDEPENDENT FINANCIAL GROUP, LLC63814.11%27.43%7.84%
KOVACK SECURITIES INC.43413.36%28.57%13.13%
OPPENHEIMER & CO. INC.221712.45%19.53%4.15%
WEDBUSH SECURITIES INC.63412.15%20.98%5.05%
INVESTORS CAPITAL CORP.64111.23%20.44%6.08%
WUNDERLICH SECURITIES, INC.45911.11%21.79%4.58%
UBS FINANCIAL SERVICES INC.1255510.97%14.84%0.75%
FIRST ALLIED SECURITIES, INC.117910.35%17.05%4.16%
NEXT FINANCIAL GROUP, INC.7969.42%17.21%2.64%
VSR FINANCIAL SERVICES, INC.5119.39%12.72%1.37%
STERNE AGEE FINANCIAL SERVICES, INC.5809.14%18.97%6.03%
WELLS FARGO ADVISORS FINANCIAL NETWORK, LLC19938.83%14.95%1.51%
AMERICAN PORTFOLIOS FINANCIAL SERVICES, INC.8388.71%16.95%4.30%
MORGAN STANLEY SMITH BARNEY LLC237828.68%12.81%0.63%
RAYMOND JAMES & ASSOCIATES, INC.58128.40%13.20%1.74%
JANNEY MONTGOMERY SCOTT LLC13698.33%13.88%2.12%
STIFEL, NICOLAUS & COMPANY, INCORPORATED45888.28%13.19%2.46%
SIGMA FINANCIAL CORPORATION6788.11%14.16%2.80%
INVESTACORP, INC.5007.80%16.20%3.40%
WELLS FARGO ADVISORS, LLC263197.59%12.12%1.17%
SECURITIES AMERICA, INC.26627.18%13.67%2.29%
UNITED PLANNERS' FINANCIAL SERVICES OF AMERICA5106.86%15.49%3.73%
GIRARD SECURITIES, INC.4776.50%15.30%3.98%
CETERA ADVISORS LLC16186.49%13.60%2.97%
NATIONAL PLANNING CORPORATION18156.45%13.88%2.09%
PURSHE KAPLAN STERLING INVESTMENTS, INC.12296.35%12.21%2.69%
PARKLAND SECURITIES, LLC4646.25%13.36%2.37%
D.A. DAVIDSON & CO.9146.24%10.39%1.64%
RBC CAPITAL MARKETS, LLC52506.06%9.66%0.86%
RAYMOND JAMES FINANCIAL SERVICES, INC.54615.91%11.33%1.96%
KMS FINANCIAL SERVICES, INC.4525.75%10.62%2.43%
QUESTAR CAPITAL CORPORATION8245.70%12.38%2.06%
SII INVESTMENTS, INC.8095.69%10.75%1.36%
ROYAL ALLIANCE ASSOCIATES, INC.21535.62%11.01%1.81%
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORP.332885.53%8.41%0.29%
SAGEPOINT FINANCIAL, INC.22785.31%11.81%2.77%
J.J.B. HILLIARD, W.L. LYONS, LLC7325.05%8.61%1.23%
AMERIPRISE FINANCIAL SERVICES, INC.139525.01%10.55%1.02%
FSC SECURITIES CORPORATION15034.92%10.78%1.60%
TRIAD ADVISORS, INC.8384.89%10.38%2.74%
STEPHENS INC.6594.86%8.35%0.15%
VALMARK SECURITIES, INC.4554.84%7.69%0.22%
IFC HOLDINGS, INC.14964.68%10.56%2.01%
H. BECK, INC.7934.67%12.99%5.42%
CAMBRIDGE INVESTMENT RESEARCH, INC.35384.58%10.15%2.12%
CADARET, GRANT & CO., INC.9124.50%11.29%2.63%
NFP ADVISOR SERVICES, LLC19174.49%9.70%2.19%
BB&T SECURITIES, LLC7644.45%8.12%1.70%
AMERITAS INVESTMENT CORP14634.37%9.64%1.57%
SUNTRUST INVESTMENT SERVICES, INC.15104.37%10.86%1.92%
LPL FINANCIAL LLC183154.35%9.12%1.21%
LINCOLN FINANCIAL SECURITIES CORPORATION11744.26%8.69%1.19%
SANTANDER SECURITIES LLC7254.14%9.79%3.03%
COMMONWEALTH EQUITY SERVICES, INC.27804.03%7.88%1.01%
SECURITIES SERVICE NETWORK, INC.4773.98%9.64%1.26%
EQUITY SERVICES, INC.5983.68%10.03%2.34%
AXA ADVISORS, LLC54743.64%8.88%0.31%
ROBERT W. BAIRD & CO. INCORPORATED24293.58%5.97%0.58%
BMO HARRIS FINANCIAL ADVISORS, INC4773.56%7.97%1.05%
INVESTMENT CENTERS OF AMERICA, INC.6183.56%6.80%0.81%
CETERA ADVISOR NETWORKS LLC31453.47%7.19%1.08%
VOYA FINANCIAL ADVISORS, INC.28063.28%8.27%0.86%
WOODBURY FINANCIAL SERVICES, INC.14793.25%10.89%1.28%
SIGNATOR INVESTORS, INC.16513.15%8.60%1.51%
THE LEADERS GROUP, INC.6733.12%8.02%2.23%
HORNOR, TOWNSEND & KENT, INC.11943.10%7.79%1.34%
METLIFE SECURITIES INC.72333.08%7.88%0.68%
LINCOLN FINANCIAL ADVISORS CORPORATION24363.04%7.06%0.94%
MONEY CONCEPTS CAPITAL CORP5273.04%9.30%1.71%
PLANMEMBER SECURITIES CORPORATION5722.97%11.19%2.10%
CUNA BROKERAGE SERVICES, INC.7852.93%7.64%0.38%
ONEAMERICA SECURITIES, INC.8792.84%8.42%2.50%
INFINEX INVESTMENTS, INC.6092.79%8.37%1.15%
NYLIFE SECURITIES LLC83522.74%8.14%0.41%
1ST GLOBAL CAPITAL CORP.10342.71%5.13%0.29%
THE O.N. EQUITY SALES COMPANY9442.65%8.69%2.54%
PROEQUITIES INC15142.64%7.99%0.92%
BANCWEST INVESTMENT SERVICES, INC.4222.61%6.40%0.95%
PARK AVENUE SECURITIES LLC28412.60%7.81%1.51%
PRUCO SECURITIES, LLC52032.59%7.75%0.37%
FIFTH THIRD SECURITIES, INC.15302.55%6.54%1.70%
KEY INVESTMENT SERVICES LLC11512.43%6.26%2.17%
M HOLDINGS SECURITIES, INC.9222.39%6.29%0.65%
SECURIAN FINANCIAL SERVICES, INC.16432.37%7.12%0.24%
CUSO FINANCIAL SERVICES, L.P.6892.32%7.69%1.60%
MML INVESTORS SERVICES, LLC54092.29%8.78%2.03%
CETERA INVESTMENT SERVICES LLC19262.28%6.44%1.04%
GWN SECURITIES INC.6602.27%9.55%1.67%
WADDELL & REED, INC.28592.24%7.73%1.01%
FIRST REPUBLIC SECURITIES COMPANY, LLC5482.19%4.01%0.55%
CHARLES SCHWAB & CO., INC.76162.14%5.28%0.13%
TRANSAMERICA FINANCIAL ADVISORS, INC.49432.02%6.64%0.79%
PRINCOR FINANCIAL SERVICES CORPORATION36541.94%6.95%0.79%
U.S. BANCORP INVESTMENTS, INC.17371.90%5.76%1.21%
BB&T INVESTMENT SERVICES, INC.7531.86%4.52%0.27%
LINCOLN INVESTMENT PLANNING, LLC11301.86%6.90%0.80%

We also include the measure of these firms using Egan, Matvos and Seru's more expansive definition and the ranking by the percentage of brokers employed at each firm that had previously been fired by another firm after customer allegations. You can sort the list of 100 firm on any of these three measures by clicking on the title at the top of each column.

The 10 highest risk firms with more than 400 brokers include the same 10 firms whether using the FINRA study definition or the broader financial misconduct measure. These 10 firms - especially the six worst firms Aegis Capital, Summit Brokerage Services, National Securities, Centaurus Financial, Independent Financial Group and Kovack Securities - employ a far higher percentage of bad brokers than other firms. 7.71% of the registered brokers in these six high risk firms have been fired at least once by a previous employer after allegations of misconduct, 10 times the average of 0.78% of the remaining 204 brokerage firms. Given their coworkers' disclosure records as of 2014, 83.7% of the brokers at these six firms would be in the highest risk quintile as defined in the FINRA study and should be avoided by investors. The BrokerCheck reports for most of the brokers at these six firms should prominently display a skull and crossbones warning.



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