Wandering financial advisers must be corralled, but who will break them in?

InvestmentNews for years has been focusing on the weakness of the broad system of U.S states’ oversight of agents selling insurance products and how it fails to work with regulators who oversee financial advisers and registered reps selling securities like mutual funds or individual stocks.

This publication has been detailing stories of rogue brokers who’ve been kicked out of the securities industry by a state or the Securities and Exchange Commission only to hang onto a license to sell insurance products and present themselves as a financial planner of some repute.

As we have reported, the harm to investors and the blight on the broad reputation of financial advisers is acute.

When I called the Financial Industry Regulatory Authority Inc. and the National Association of Insurance Commissioners last year and asked what they were doing about the problem, I was told that the two groups are sharing licensing data and information about rogue agents and brokers.

Now, the industry finally has a better picture about rogue brokers who take refuge in the land of insurance sales, and it’s pretty ugly.

Thanks to a team of law professors, one of whom is a former SEC commissioner, Finra and the NAIC should be thinking of a public response to the painful issue of the so called “Wandering Financial Advisors,” the title of the paper published last month.

“Advisers with a prior history of serious misconduct are significantly more likely than their peers to wander — and to commit misconduct in the future,” according to the study. “And we identify state-registered insurance producers as the most common regime in which wandering advisers with a history of misconduct continue to work.”

The study’s authors are Colleen Honigsberg, associate professor of law at Stanford Law School; Edwin Hu, research fellow at New York University School of Law; and Robert J. Jackson Jr., law professor at NYU and until recently an SEC commissioner.

The study, which says it is the first to examine wandering advisers, is based on a review of 1.2 million financial advisers who were overseen by Finra or the SEC or were insurance producers or members of the National Futures Association between 2010 and 2020.  

A “wandering financial adviser” simply leaves the highly regulated, centralized world of securities sales, most often to concentrate on selling insurance products, which operate under a decentralized and Balkanized group of state regulators, according to the paper.

“We find that wandering advisers with a history of serious misconduct disproportionately end up in the highly-fragmented state insurance regimes,” according to the paper.

Translated, that means rogue brokers who do harm selling securities are likely to flee to the insurance side of the financial advice industry where they can wreak havoc for years.

The report begs the question: What are Finra’s and the NAIC’s plans to tackle this problem of rogue brokers who wander?

The differences between the securities and insurance regulatory regimes are stark and benefit rogue brokers. “Insurance producers, unlike Finra brokers or [SEC registered] advisers, do not rely on a single firm for sponsorship, licensing, or registration — meaning that, in most cases, no single company is responsible for an insurance producer’s conduct,” the paper concludes.

Individual states vary widely in how often they take regulatory actions against insurance salespeople, a troubling inconsistency, according to the study.

Information about wandering advisers is also hard to find and access. “There is also no consumer-oriented, centralized website containing insurance producers’ misconduct records,” according to the study, which makes it easier for rogue brokers to bury their misdeeds from the public eye.

“The baseline rates of misconduct and serious misconduct among all Finra brokers more than double for those who wander away from the Finra regime but continue providing financial advice as insurance brokers and NFA members,” according to the study. “These trends are concerning, as they suggest that ‘bad’ advisers in the Finra broker regime exit but continue to provide consumer financial services. In particular, the data show, many become insurance producers.”

“Over 50,000 of our wandering advisers remain insurance producers,” according to the study. “Individuals with serious misconduct are more likely to drop their status as a Finra broker or (SEC-registered) adviser — but less likely to drop their insurance license.”

I reached out to spokespeople for Finra and the NAIC on Tuesday for their reaction to the study.

State insurance commissioners “are steadfast in their commitment to protect consumers from bad actors and those who believe they can escape regulation by moving to the insurance industry will be sorely disappointed,” an NAIC spokesperson wrote in an email.

A Finra spokesperson did not respond to a request for comment.

Based on 20 years of covering the financial advice industry, I have very little confidence in Finra and the NAIC’s ability to make headway against this problem. But with this paper, at least we have a window into the working world of wandering financial advisers. It’s a start.

The post Wandering financial advisers must be corralled, but who will break them in? appeared first on InvestmentNews.

As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.

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