Of Brokers and Bankruptcy

Jerome P. Crabb said that “Crime is to man as fleas are to dog, the likelihood of its presence increases as the quality of one’s personal circumstances decreases.” You may or may not subscribe to the theory that people usually do bad things when they’re forced to and steal when their backs are against the wall. It’s a debate that’s been raging since Aristotle, we’re not going to solve it here.

Once upon a time, I was a stockbroker and spent a few months as a branch manager too (biggest mistake of my life, read the book). One of the things I can tell you for a fact was that the brokers who were in the worst shape financially were always the biggest compliance risks. This is very simple – in a transaction-oriented business where the worst practices and products will frequently offer brokers the highest pay, you’d have to be an idiot to expect a positive outcome for the client of a desperate salesperson.

If a broker had credit card people and repo guys and banks breathing down his neck, of course he’d be more liable to push a high-paying private placement on the wrong client, or churn a few accounts before the end of a pay period. This is human nature we’re talking about, in the brokerage business no less – not exactly an industry seen as the paragon of moral virtue to begin with.

This demented system of conflicted compensation arrangements is precisely why I hated it so much and couldn’t wait to escape it. It’s why I wrote Backstage Wall Street and so much of what you’ve read here on the blog.

The Wall Street Journal’s Jean Eaglesham and Rob Barry have confirmed this correlation between broke brokers and bad behavior in a new story this week. They looked at a rash of missing bankruptcy filings in brokers’ official records. They’ve cross-checked the disciplinary and complaint history for brokers who’ve filed for bankruptcy and found exactly what you would expect…

Mr. Leiva is one of more than 1,600 stockbrokers whose records failed to disclose bankruptcy filings, criminal charges or other red flags in violation of regulations, without regulators noticing, according to a Wall Street Journal analysis.

These same brokers have also accumulated more disciplinary actions by regulators and complaints from clients, on average, than other brokers, the Journal’s analysis of hundreds of thousands of stockbroker records shows…

While a bankruptcy filing in itself doesn’t suggest dishonesty, brokers who had unreported bankruptcies had worse disciplinary records than the industry norm, on average. For example, they were more than twice as likely to have been fired. About one in 33 had three or more other black marks such as customer complaints or terminations on their regulatory histories, a rate more than 65% higher than other brokers.

And a killer graphic:

Screen Shot 2014-03-06 at 7.44.08 PM

The most toxic combination you could ask for is to put someone who owes a lot of money in a position to advise others. Throw in the perverse incentive of selling concessions on products and commissions on agency trades, and you have a disaster waiting to happen. Ain’t no amount of disclosure, fine print, oversight or potential consequences that are going to change that.

The Journal makes the case that people with bankruptcy filings have not done anything wrong, but if they’d disclosed these as they were supposed to, people might have thought twice before sending them investment capital to steward. And I agree.

Source:

Stockbrokers Fail to Disclose Red Flags (WSJ)

Read Also:

Backstage Wall Street on Amazon

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Immediate Edge Review 2020 commented on Sep 23

    … [Trackback]

    […] Find More here on that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]

  2. bitcoin evolution review commented on Sep 29

    … [Trackback]

    […] Here you can find 22282 additional Information on that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]

  3. RPA testing commented on Nov 12

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]

  4. tangerine business account sign in commented on Nov 14

    … [Trackback]

    […] Here you can find 92322 additional Info on that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]

  5. Regression Testing Solutions commented on Nov 28

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]

  6. Azure DevOps commented on Dec 18

    … [Trackback]

    […] There you will find 30179 additional Info on that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]

  7. 사설토토 commented on Dec 25

    … [Trackback]

    […] Read More Information here to that Topic: thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/ […]