The Market for Financial Adviser Misconduct

78 Pages Posted: 29 Feb 2016 Last revised: 14 Dec 2017

Mark Egan

Harvard Business School

Gregor Matvos

University of Texas at Austin - Department of Finance

Amit Seru

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2017

Abstract

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. We provide the first large-scale study that documents the economy-wide extent of misconduct among financial advisers and the associated labor market consequences of misconduct. Seven percent of advisers have misconduct records, and this share reaches more than 15% at some of the largest advisory firms. Roughly one third of advisers with misconduct are repeat offenders. 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 jobs after misconduct. The labor market partially undoes firm-level discipline by rehiring such advisers. Firms that hire these advisers also have higher rates of prior misconduct themselves, suggesting "matching on misconduct." These firms are less desirable and offer lower compensation. We argue that heterogeneity in consumer sophistication could explain the prevalence and persistence of misconduct at such firms. Misconduct is concentrated at firms with retail customers and in counties with low education, elderly populations, and high incomes. Our findings are consistent with some firms "specializing" in misconduct and catering to unsophisticated consumers, while others use their clean reputation to attract sophisticated consumers.

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

JEL Classification: G24, G28, D14, D18

Suggested Citation

Egan, Mark and Matvos, Gregor and Seru, Amit, The Market for Financial Adviser Misconduct (September 1, 2017). Journal of Political Economy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2739170 or http://dx.doi.org/10.2139/ssrn.2739170

Mark Egan

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Gregor Matvos

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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