Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks
86 Pages Posted: 27 Nov 2017 Last revised: 11 Apr 2019
Date Written: March 8, 2019
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: Suggested Citation