Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks

86 Pages Posted: 27 Nov 2017 Last revised: 11 Apr 2019

See all articles by Kelvin Law

Kelvin Law

Nanyang Technological University (NTU)

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 2019

Abstract

We examine whether financial advisors with pre-advisor criminal records pose a greater risk to investors than those without. We find that financial advisors with pre-advisor criminal records are more likely to receive future customer complaints. Their complaints are more likely to receive arbitration awards or settlements and are more likely to involve large settlements exceeding $100,000. Finally, clients are more likely to suffer service disruptions from engaging advisors with pre-advisor criminal records, even incremental to the brokerage firm being high-risk. While we do not have performance data of individual advisors, mutual funds of those firms that employ advisors with criminal records do not provide their clients with superior returns nor charge lower fees, suggesting that there are not compensating benefits to offset the investor harm. Overall, pre-advisor criminal record serves as an important ex ante characteristic available to regulators, investors, and employers for risk-assessment purposes.

Keywords: Background check; criminal records; financial advisors; investor protection; gatekeepers

JEL Classification: D14; D18; G20; G24; G28; K22

Suggested Citation

Law, Kelvin and Mills, Lillian F., Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks (March 8, 2019). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3075305 or http://dx.doi.org/10.2139/ssrn.3075305

Kelvin Law (Contact Author)

Nanyang Technological University (NTU) ( email )

Nanyang Business School
Singapore, 639798
Singapore

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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