Does FINRA’s BrokerCheck Protect Investors from Bad Financial Advisors?

Most financial advisors are likely honest and hardworking.  Unfortunately, there is a statistically small number of “bad actors” in the industry. If you don’t check your advisor’s record, you might be unknowingly working with one of these problem individuals. 

FINRA BrokerCheck: A Potential Solution?

The Financial Industry Regulatory Authority, known as FINRA, is a private corporation that acts as a self-regulatory organization for the securities industry.  They maintain an online database called BrokerCheck. 

BrokerCheck[1] is a free tool intended to help you research the professional background of brokers, brokerage firms, investment adviser firms, and individual financial advisers.

What Should You Look For? 

BrokerCheck includes various types of information, but here are the most important red flags to watch for.

Disclosure Events.  This is the significant one.  You want to look for regulatory events, bankruptcies, and terminations.  The really important ones are customer complaints, arbitrations, judgments, and liens.  If you have an advisor with any of those items on their record, you should consider switching advisors since it may not be worth the risk. 

Why?  Because multiple researchers[2] who considered hundreds of thousands of broker records concluded that prior instances of misconduct often predicted future misconduct.  In other words, a financial advisor with one disclosure is statistically more likely to harm investors in the future. 

Work History.  Problem brokers and financial advisors can tend to change firms frequently. If you see someone who has jumped around a lot, that can be a sign of deeper issues.

BrokerCheck is meant to be a centralized repository for all the records of the nation’s financial professionals.  Which, of course, sounds great:  you just go to BrokerCheck.org, type in your financial advisor’s name, and see their record.  Any red flags should be detailed so you can click on them and learn more. 

But can you trust what you see?

Growing Criticism of FINRA BrokerCheck

FINRA BrokerCheck, in theory, is a great resource.  Unfortunately, consumer groups have found that it falls short, very short, potentially even putting investors at risk. 

Here are the issues found by various consumer groups who looked into the BrokerCheck platform and data.

Incomplete records.  Critical data on arbitrations and legal judgments that are available from state regulators are not always incorporated into this platform. Yet, the platform doesn’t clearly acknowledge this.  This is even after several consumer groups have repeatedly notified FINRA of these omissions. 

Even after being notified of this problem, FINRA has not taken action to rectify the situation or put a clear message on the limits of BrokerCheck.  In fact, since these notifications, FINRA has spent significant resources promoting the system. 

It even hired famed advertising agency Ogilvy & Mather to create humorous, consumer-friendly ads about people taking action without conducting background research.  Viewers are urged to always use BrokerCheck before selecting a financial advisor or suffer consequences. 

Other than one note on a separate page, there is no disclaimer on BrokerCheck.org that the information displayed may be incomplete.  Nor does the system include a warning to always check with your state regulator.  Instead, the website leads viewers to believe that the information provided is comprehensive.    

While there is a note elsewhere on the platform encouraging consumers to check with state regulators, it does not appear directly on the BrokerCheck platform. 

Self-Reported.  One significant flaw in the overall system is the fact that everything is self-reported.  Principals at the company are responsible for ensuring that their employees report everything.  Researchers found that brokers and their employers are not reporting the negative outcomes of arbitrations in many instances. 

And it’s not just a few bad apples, either.  Researchers estimated that hundreds, and perhaps thousands, of active brokers provide falsified BrokerCheck reports by not updating records if they lost an arbitration.  Many times, they fail to report customer complaints as required.

A Wall Street Journal article from March 2014 reported that more than 1,600 stockbrokers failed to disclose bankruptcy filings, criminal charges, and other red flags without regulators noticing.

FINRA did react to that particular article and adopted a temporary program to help address the underreporting of information, but researchers found these problems persist.

Expungements.  Expungement is the process of removing information from an official record.  FINRA has in the past allowed brokers to ask that records be deleted in certain circumstances, helping the brokers but leaving investors woefully in the dark about past behavior.

Unfortunately, FINRA has been made aware of these issues and does not appear motivated to make any changes.

Just How Widespread are Abusive Practices?

One working paper attempted to study the full extent of misconduct in the industry.  Among the findings:

• There is evidence to suggest that some firms are more tolerant of misconduct than others. 
• The median settlement paid to investors related to broker misconduct is $40,000 (and 25% of the settlements exceed $120,000).
• One-third of brokers with misconduct on their records are repeat offenders.
• These repeat offenders are five times more likely to participate in misconduct again compared with the average broker.

What You Can Do To Protect Yourself

The main takeaway?  It is clear that as an investor, you need to proactively do more digging. 

1. Start with BrokerCheck, but understand it may be very incomplete.
2. Contact your state regulator—you can use this website[3] as a starting point.
3. Ask the prospective (or current) financial advisor to put their regulatory record in writing, acknowledge it as complete and sign it.  While that may not be perfect, there are two reasons to go in that direction.  First, honest financial advisors will understand and respect your concern and comply without hesitation.  If there is hesitation, that can be a very valuable message that you should keep looking. 
4. Another relevant finding from the research[4] is that a broker’s coworkers often influence their behavior. Unfortunately, there is no feature in the current BrokerCheck platform that provides data on others that work at the firm or in the same office.  So that may mean you ask for a list of all the brokers who work in that office, then investigate them as well.
5. Contact us[5] if you lost money investing.

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