Smaller Brokerage Firms Are Even Worse!
By Craig McCann, PhD, CFA , Chuan Qin, PhD and Mike Yan, PhD, CFA, FRM
Last week we posted Have 1.3% or 7.3% of Stock Brokers Engaged in Misconduct? explaining that the competing estimates of broker misconduct differ because of differences in their definition of misconduct and the sample of brokers studied.
Firms with 400 to 999 Brokers Are Much Worse Than Larger Firms.
In last week’s post, we listed the 100 highest risk brokerage firms with 400 or more registered brokers sorted by the percentage of their brokers associated with Investor Harm Events as of December 31, 2015 as defined by the FINRA study, “Do Investors Have Valuable Information about Brokers?” available here. The 10 highest risk firms with more than 400 brokers, listed below in Figure 1, are the same 10 firms whether using the FINRA study definition or Egan, Matvos and Seru’s broader financial misconduct measure from “The Market for Financial Adviser Misconduct”, available here.
Figure 1: 10 Highest Risk Firms with More Than 400 Brokers, December 31, 2015
Nine of these 10 firms – Aegis Capital, Summit Brokerage Services, National Securities, Centaurus Financial, Independent Financial Group, Kovack Securities, Wedbush Securities, Investors Capital Corp. and Wunderlich Securities – have between 400 and 999 brokers and so are not included in Egan Matvos and Seru’s Table 6 reproduced here as Figure 2. That is, 9 of the 10 highest risk firms with more than 400 brokers have fewer than 1,000 brokers. And the worst of these firms with more than 400 brokers are twice as bad as the worst firms in Egan Matvos and Seru’s Table 6 which has brought so much attention Oppenheimer, First Allied and Wells Fargo Advisors.
Figure 2: Egan Matvos and Seru’s, page 37, Table 6
The Smaller Firms Are Even Worse!
The brokerage firms with fewer than 400 brokers are even worse than the brokers with between 400 and 999 brokers. Figure 3 below relaxes the threshold to include firms with 100 or more brokers. There are 32 higher risk brokerage firms with 100 or more brokers before we get to Oppenheimer sorted by brokers with Investor Harm Events. 26 of these 32 higher risk firms have fewer than 400 brokers each. On average, 17.9% of the brokers at these 26 firms with between 100 and 399 brokers have had at least one Investor Harm Event compared to 17.0% of the brokers at the six firms ranked higher risk than Oppenheimer with more than 400 brokers.
Figure 3: 42 Highest Risk Firms with More Than 100 Brokers, December 31, 2015
It’s Ethics, Not Product Failure
UBS Financial Services of Puerto Rico has the highest percentage of brokers registered as of December 31, 2015 associated with an Investor Harm Event in Figure 3. This is perhaps not surprising given the large number of customer complaints filed over UBS Financial Services of Puerto Rico’s closed end bond funds. (You can read our February 12, 2015 summary blog post, “UBS Puerto Rico’s Bond Fund Debacle: What We Know So Far” here.)
Some commentators have incorrectly asserted that assessing brokers based on customer complaints is unfair because it tars good brokers with the results of a failed product promoted by their employer. While this might occasionally happen, it is surely the exception not the rule.
First, the rankings in Egan Matvos and Seru’s Table 6 covering firms with more than 1,000 brokers and our tables covering brokers with more than 400 or more than 100 brokers identify firms not brokers. To the extent a large number of brokers received customer complaints because of a faulty product promoted by their firm, the identification of these firms as high risk is a service to investors.
Also, even at firms which have been identified with a large product failure like Morgan Keegan with the RMK Funds, Citigroup with MAT/ASTA and UBS with the Lehman Brothers structured products the vast majority of brokers were not subject to customer complaints. If a broker has a lot of customer complaints related to a product failure the broker likely bears some significant responsibility.
Finally, brokers with a customer complaint in one year are far more likely to have customer complaints in the next year, the second year, the third year and so on. If the extent of customer complaints was related in any meaningful way to product failures, we wouldn’t see the persistence we observe in the data.
Former SEC Branch Chief fighting for individuals and small businesses in government investigations and enforcement actions
7 年Many thanks to Craig McCann and everyone at SLCG for meticulous and thorough research into this question. SLCG has collected the data and done the analysis to show what investor attorneys anecdotally observed over the years -- it is ethics, not product failure, that is the prime reason investors get taken advantage of. Well said Craig.
Owner, SLCG Economic Consulting LLC
8 年Our paper and the Egan Matvos and Seru paper are tough sledding but worth reading for anyone serious about these issues. The worst firms are not quality firms with a failed product or two. They are firms that specialize in preying on unsophisticated investors - not my conclusion, EMS's conclusion. These firms hire brokers that have been fired one or more times by higher quality firms for customer complaints. The co-worker and executive disciplinary records at these firms are powerful predictors of future customer complaints. Again not just our conclusions, EMS's conclusion as well. Finally, as I wrote, a broker with a customer complaint is 5 times as like as a broker without a complaint to have another customer complaint 5 years after the last complaint. This would not be the case if product failures explains high investor hard rates. UBS PR is the exception in our list of worst firms. If you exclude filings related to the recent PR debacle, UBS PR drops out of the worst thirty firms. The other firms earned their places of infamy by old timey frauds like churning accounts and selling high cost products such as variable annuities, non-traded REITs, oil & gas, equipment leasing and similar investments. That these high risk firms "approved" these products does not absolve the high risk brokers the firms hired to sell these awful investments to unsophisticated investors. These were not product failures, they products work exactly as intended by the firms and the brokers.
Florida and Minnesota- Tax Law, Estate Planning, Trusts and Estates, and Business Succession Planning
8 年You make a valid point. Liability should depend on each set of facts and circumstances, including the nature and severity of "red flags" (indications that further inquiry is warranted) and whether the broker has the power and authority to access the necessary information to resolve the issues. It requires a level of intelligence and good judgment for a broker to know when to run the other way when coming up against a stone wall in the pursuit of answers.
Movie Consultant and Actor, Owner BayRidge-Herbst-Trzaska-Waldeck Chapels
8 年Being a victim of the Philip Barry Ponzi scheme, the federal trial brought up forensic information on his banking habits, which years sooner could have been discovered by the four banks he used, preventing my family and other from becoming victims. As per millions in and out, writing hundreds of worthless checks and paying 10' of thousands of dollars in fees. So I guess this is normal banking activities????