Ever check your financial advisor's history? You should

While the financial industry isn't exactly the most trusted industry among Americans, there's a reason for investors to look closer to home by checking their own advisors' background.

More than 7 percent of financial advisors have a history of misconduct, signaling "relatively commonplace" problematic behavior ranging from putting a client in an unsuitable investment to outright fraud, according to a new paper from researchers at University of Chicago's Booth School of Business and the University of Minnesota's Carlson School of Management.

While that's troubling enough, those "bad apples" often aren't weeded out of the financial industry, the researchers found. Even if financial misconduct leads to that advisor's firing at one firm, they often find new jobs at a competitor. And once an advisor has engaged in misconduct, chances are they'll continue in their shady behavior, the researchers found.

"What surprised me is this is a very competitive industry, and there are a lot of firms and this information is very easily accessible," said Gregor Matvos, one of the authors of the study and an associate professor of finance at the University of Chicago. "Despite that fact, advisors with blemishes get employed by some of the biggest firms in the industry. That was one the biggest surprises."

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University of Chicago, University of Minnesota

Advisors with a history of misconduct often see their careers suffer, however. When they find a job after an incident, it's often at a less prestigious firm and at lower pay. The result is that such advisors are hired at firms that already have staff with similar issues, with the researchers noting that it suggests a "matching" between firms and advisors on the issue of misconduct.

So which firms fall into that category? The researchers, who culled the information from FINRA's BrokerCheck database of all financial advisors who worked in the U.S. from 2005-2015, name names, citing the firms with the largest percentage of advisors with past misconduct (see table below).

Oppenheimer & Co. tops the list, with one of five advisors having at least one incident of misconduct in their file, they found. In a statement, Oppenheimer said it has "made significant investments to proactively tackle risk and compliance issues in our private client division," such as adding compliance and audit professionals, upgraded its systems, and appointed new senior leadership and a new global compliance officer.

"Oppenheimer recognized the need to address these legacy issues head on, and we are confident that we have put in place safeguards to ensure that our advisors and other employees meet the highest ethical standards," the company said.

Rather than rely on firms to employ only blemish-free advisors, which isn't a given, investors should check FINRA's BrokerCheck site to research their advisor, Matvos said. Some investors may not be aware of that resource, he noted. And there may be advisors who are banking on that.

Advisors with a record of misconduct are often found in geographic areas where a particular type of person can be found: someone wealthy, elderly and less educated about financial issues. Some counties in Florida and California have a high percentage of "bad apple" advisors, with Monterey, California and Palm Beach, Florida having rates of 18.4 percent and 18.1 percent, respectively, of advisors with past misconduct.

"On average, with areas where we have older people you'll see more misconduct," Matvos said. "Suppose you are a surgeon. You made a lot of money, but it doesn't mean you have spent a lot of time on how you will build a portfolio."

Given that the median settlement for misconduct is $40,000, that suggests these advisors are doing serious damage to households, the researchers noted. Investors who are working with advisors with past misconduct could very well be putting their nest eggs at risk, the research indicates.

"People with previous misconduct are more likely to engage in misconduct," Matvos said. "Once they do it, they are more likely to do it again. That's true for every service industry. There are good plumbers and bad plumbers. The question is how does the industry deal with these bad eggs? Do they keep providing services, or do they disappear? A lot of them seem to stick around."