Study finds increase in advisor misconduct at RIAs following private equity buyouts

On Behalf of | Jan 21, 2022 | Broker Misconduct

A new study has found there is an increase in advisor misconduct when private equity firms buy out registered investment advisor firms, according to ThinkAdvisor.

The study, published last month, was conducted by a team of researchers at the University of Oregon. It determined that when private equity firms acquired RIAs, there was a 147% increase in the percentage of the acquired firm’s financial advisors committing misconduct. The research also showed that the average number of misconduct incidents following the change in ownership rose by 200%. The increase was greater among RIAs that had higher post-buyout growth in assets under management per advisor.

Prior to the buyouts, the misconduct rates of RIAs examined in the study were about 40% of the average rate for the industry. But the rate became in line with the rest of the industry average following the buyouts. The study suggested that private equity firms target RIAs with better regulatory records.

The researchers concluded that the rise in misconduct was linked to the push for maximizing profits after a takeover, and noted what they called a tension between firms’ profit motive and ethical business practices. “These results suggest implications about the value of misconduct,” the study said. “If we assume PE maximizes firm value, the increased level of misconduct implies that higher misconduct is related to higher profit. “PE firms choose targets with untapped ‘misconduct slack’ and exploit this opportunity to make profit, perhaps at the expense of customers.

The intent of the study was to determine whether ownership of RIAs by private equity firms encouraged or deterred advisor misconduct. It found that the increase in misconduct was concentrated among firms that cater to retail customers.

The financial broker misconduct attorneys at Lewitas Hyman are uniquely qualified to represent individual investors in investment-related claims against financial professionals and their firms in cases involving advisor misconduct. We understand how financial professionals and their firms are supposed to operate through decades of experience working for the SEC and firms like Morgan Stanley and UBS Financial Services.  If you have suffered investment losses as a result of misconduct by your financial professional or their firms, contact Lewitas Hyman at (312) 291-4600 or through our online contact form for a free consultation.

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