Where do bad brokers work and live?

The rule of thumb for bank robbers is they rob banks because that’s where the money is. The rule of thumb for "bad brokers," sometimes called cockroaches, is to live and rob where the sun shines brightest, because that’s where all the retirees are.

High-risk brokers tend to cluster in the warmer climes of the Southeast and Southwest, according to a new research paper, titled “Regulatory leakage among financial advisors: Evidence from FINRA regulation of 'bad' brokers,” published in the Journal of Financial Economics.

The academic paper tallies a total of 4,062 FINRA-registered brokers in 2018 who were considered high-risk, or roughly 0.6% of the total number of FINRA brokers. A high-risk broker is defined as carrying two or more “specified risk events” or one or more final criminal matters.

“Although such individuals are spread across the U.S., they appear particularly concentrated in the Southeast and Southwest,” according to the paper, which was written by law professors Colleen Honigsberg, Edwin Hu, Robert J. Jackson Jr. “Nevada had the highest percentage of high-risk brokers, at 4.9%, with Florida and North Dakota close behind with around 4%.”

Add in New Mexico and Arizona, with concentration of bad brokers, respectively, of 3.9% and 3.8% as other warm-weather states where retirees flock to that pose risks.

“All these state have a very high percentage of the population that is retired and they are seeking ways to manage their money and they are also concerned about outliving their money,” said Rita Robbins, president of Affiliated Advisors, one of the largest offices affiliated with Osaic Wealth. “Sadly, it’s an appealing marketplace for the wrong people, the cockroaches.”  

As InvestmentNews noted in a previous column, the insurance industry is more lightly-regulated than Wall Street, regional and small broker-dealers and registered investment advisors, all of which must answer to either FINRA or the Securities and Exchange Commission (SEC).

Indeed, “insurance seems to attract FINRA brokers with a history of misconduct,” and bad brokers “flow to insurance,” are two of the conclusions of the academic study.

Now that FINRA and the rest of the industry has identified the bad brokers, it’s up for the states insurance commissioners to keep a close eye on their behavior, particularly the products they sell, said one plaintiff’s attorney.

“I’ve seen very little to zero oversight by insurance regulators of products,” Jeff Sonn, a plaintiff’s attorney, told InvestmentNews. “There should be a review once a year of brokers and insurance agents with the highest number of investor complaints. We’ve seen insurance agents selling investment in Ponzi schemes. They’re just not trained to sell alternative investments and products.”

“And as the population ages, it’s an even bigger problem to address,” Sonn said. “You can’t have an industry that allows recidivists to hide in plain sight.”