- A Florida wealth-management firm that oversees $US2.5 billion hires brokers who’ve had run-ins with the law or regulators.
- Some of the brokers reported minor infractions, such as shoplifting as a teenager, while others faced enforcement actions from groups like the Financial Industry Regulatory Authority.
- The midsize firm’s strategy – which industry headhunters say is unique – helps it broaden the talent pool, according to its founder.
One would-be broker stole two hot dogs while drunk in college. Another was fined and fired when his firm created and forced him to sell bad products to individual investors. And another racked up a dozen incidents with a financial regulatory group and nearly let his licence expire but couldn’t see what he did wrong.
All had black marks on their public records.
Who deserves a second chance?
Ed Cofrancesco, the president of International Assets Advisory, a wealth-management firm in Orlando, Florida, said his company hired the first two brokers but nixed the third.
IAA, which oversees about $US2.5 billion in client money, takes an unusual approach to recruiting. The firm proudly hires some brokers considered unemployable at other firms because of past offenses, ranging from misdemeanours in college to misconduct as a professional.
Headhunters say this approach won’t work for most firms because of the potential for reputational risk and the heightened level of internal supervision involved. But Cofrancesco insists the strategy has allowed him to tap a wider pool of talent. It’s also the right thing to do, he said.
“I believe in second chances and that there are two sides to every story,” he said. “Giving second chances is part of being an American and a Christian.”
Of IAA’s 150 financial advisers, 36% must check “yes” on one part of a registration form from the Financial Industry Regulatory Authority, an industry-funded brokerage regulator, that would automatically disqualify them from even being considered for a job at most firms.
The disclosure questions, on three pages, ask applicants whether they have been charged with a felony or a variety of misdemeanours. Applicants must also detail any run-ins with regulators such as the Securities and Exchange Commission.
Most employers automatically screen out applicants who answer “yes” to any of the 57 questions on FINRA’s disclosure form, according to headhunters. IAA, on the other hand, will consider those brokers through a process that recruiters say they have not seen elsewhere.
“A few years ago, people weren’t as absolute about it,” Danny Sarch, the founder of Leitner Sarch Consultants, a recruiting firm in White Plains, New York, said, adding that “now there are certain firms that just won’t hire” any brokers with those disclosures. Blue-chip firms often want to avoid the reputational risk that comes with hiring such professionals.
A 2016 study by researchers from the University of Chicago and the University of Minnesota found that about 7% of US advisers had a misconduct record. At top firms like Goldman Sachs and Morgan Stanley, that percentage fell to less than 1%.
Sarch said that when brokers with checkered pasts asked him for advice, “I tell them it’s a tough road and big firms want little to do with them because of it.”
But he said IAA’s approach was the first he’d heard of a firm “with a defined strategy” for hiring brokers with past misconduct “and the care in who they hire.”
“It’s definitely out of the ordinary,” he said, “and it’s got its share of risk.”
The researchers found reason for caution for firms considering an approach like IAA’s: Past offenders were about five times as likely to engage in misconduct as the average adviser.
‘Stealing a hot dog when you’re 18 and drunk’
Cofrancesco grew up in Brooklyn, New York, and was drawn to Wall Street by his father, who worked as a chef in JPMorgan’s private dining room. He started in the finance world as a teenager, working as an assistant trader in the equity-trading department at Shearson Hayden Stone while attending night school.
Cofrancesco eventually worked his way up to vice president at the investment firms Lehman Brothers and Raymond James, and he then became the chief operating officer at International Assets Holding Corporation, which spun off IAA. Cofrancesco left the company and then returned to IAA in late 2005 before buying the firm in December 2006.
Cofrancesco now stays out of IAA’s hiring process, which is run by a four-person committee. The firm’s chief business development officer, Ann Moore, screens candidates with any issues initially before passing her picks on to the committee, which consists of Moore, the general counsel, the chief compliance officer, and the chief operating officer.
The committee examines background checks, credit checks, external business activities, and even Google search results to parse who deserves a second chance. If those processes turn up questionable results, the hiring committee will investigate. A low credit score could stem from imprudent spending on expensive cars and vacations – but it could also mean signal a sick family member who saddled the candidate with medical bills.
Three of the four committee members must approve a candidate, though the general counsel, Myra Nicholson, said the vote was typically unanimous.
Because FINRA’s disclosure questions cover a variety of offenses, Nicholson said, she’s seen “pretty much anything.”
In one example, her committee looked at a candidate whose history might be disqualifying for other firms. Years ago, the person was browsing at a store with a friend who shoplifted. Both were charged with a misdemeanour – an automatic “yes” to FINRA’s disclosure question in 14B, which asks about “wrongful taking of property.”
“From the outside looking in, it doesn’t matter what that ‘yes’ answer is,” Nicholson said. “A ‘yes’ for stealing a hot dog when you’re 18 and drunk is the same ‘yes’ answer as stealing money from your clients.”
Even multiple “yes” answers may not indicate a candidate too problematic to hire. One initial problem – selling a product FINRA deems unsuitable for clients, for example – can compound. FINRA may suspend and fine the broker, then the state could investigate too, perhaps putting the broker on heightened supervision. IAA’s hiring committee examines both the root cause and the consequences.
“The fact that someone has four yeses doesn’t necessarily mean that they shouldn’t be looked at,” Nicholson said. “We always ask for an explanation from the rep as to what occurred. Sometimes we get an explanation and we look at each other and say, ‘That doesn’t add up – there’s something they’re not telling us.'”
The advisers who make it through the hiring committee’s screens are typically subject to on-the-job auditing. Depending on the employee’s history, the firm may restrict a broker’s type of business and employ additional monitoring.
Through the process, “we get a lot of good reps who nobody else would look at,” she said.
For those who are hired, Cofrancesco is clear that there are no third chances. About 90% of the time, the brokers are employed without further issue, he said.
In some cases, employees lied about their backgrounds – even doctored evidence – and were terminated when bad behaviour at previous firms came to light. One employee had past issues with improper use of emails, including deleting messages, and the person was fired after doing the same at IAA.
“If we give people a second chance, we have to have a zero-tolerance policy,” Cofrancesco said.
IAA also keeps an open dialogue about its hiring strategy with FINRA, asking about best practices and what other firms are doing. IAA has had seven disclosure events – which detail criminal issues, regulatory actions, and other financial matters – with the regulator, though none since 2000.
“We consistently hear that we’re doing substantially more than most other firms,” Nicholson said of supervision.
A spokesman for FINRA said the organisation did not comment on firms’ business practices.
The issue of hiring brokers with past misconduct is far from new – FINRA’s predecessor and other industry groups published guidance in the 1990s.
More recently, FINRA drew political scrutiny after the 2016 study on broker misconduct. That year, Sens. Elizabeth Warren and Tom Cotton wrote to FINRA’s CEO to ask what specific steps the organisation would take to address “the pervasive misconduct” among financial advisers.
FINRA has since said it would focus on firms’ hiring and supervisory practices for high-risk brokers. In April, it published further guidance for firms implementing supervisory practices for employees with a history of misconduct.
“That tells you it’s still a top, top priority,” said Susan Light, a former FINRA general counsel who is now a lawyer at Katten Muchin Rosenman.
Light said the regulatory groups understood that in some cases, past misconduct should not bar brokers from employment.
She recalled a conference call with regulators who examined the history of a broker who had a kidnapping conviction on his record, a felony that automatically disqualified him from registration. But the industry groups discovered that, as an 18-year-old, the man threw his friend’s car keys into an ocean. Upset and stranded, the friend called the police and had the man arrested on kidnapping charges.
The groups decided to grant the broker an exemption.
Light said any firm looking to imitate IAA’s hiring strategy needed to ensure that supervisory procedures be written down – and followed.
“When you hire a person with a disciplinary problem and you know that,” she said, “you own that problem.”
This story has been updated with IAA’s current assets under management.
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