The Market for Financial Adviser Misconduct

Mark Egan

University of Minnesota Carlson School of Management

Gregor Matvos

University of Chicago - Booth School of Business

Amit Seru

Stanford University

March 1, 2016

We construct a novel database containing the universe of financial advisers in the United States from 2005 to 2015, representing approximately 10% of employment of the finance and insurance sector. Roughly 7% of advisers have misconduct records. Prior offenders are five times as likely to engage in new misconduct as the average financial adviser. Firms discipline misconduct: approximately half of financial advisers lose their job after misconduct. The labor market partially undoes firm-level discipline: of these advisers, 44% are reemployed in the financial services industry within a year. Reemployment is not costless. Following misconduct, advisers face longer unemployment spells, and move to less reputable firms, with a 10% reduction in compensation. Additionally, firms that hire these advisers also have higher rates of prior misconduct themselves. We find similar results for advisers of dissolved firms, in which all advisers are forced to find new employment independent of past misconduct or performance. Firms that persistently engage in misconduct coexist with firms that have clean records. We show that differences in consumer sophistication may be partially responsible for this phenomenon: misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations, and high incomes. Our findings suggest that some firms "specialize" in misconduct and cater to unsophisticated consumers, while others use their reputation to attract sophisticated consumers.

Number of Pages in PDF File: 61

Keywords: Financial Advisers, Brokers, Consumer Finance, Financial Misconduct and Fraud, FINRA

JEL Classification: G24, G28, D14, D18

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Date posted: February 29, 2016 ; Last revised: March 19, 2016

Suggested Citation

Egan, Mark and Matvos, Gregor and Seru, Amit, The Market for Financial Adviser Misconduct (March 1, 2016). Available at SSRN: https://ssrn.com/abstract=2739170 or http://dx.doi.org/10.2139/ssrn.2739170

Contact Information

Mark Egan
University of Minnesota Carlson School of Management ( email )
Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
6126255679 (Phone)
HOME PAGE: http://https://sites.google.com/a/umn.edu/markegan/home
Gregor Matvos
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

Amit Seru (Contact Author)
Stanford University ( email )
650 Knight Management
Stanford, CA 94305
United States
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