Is public distrust of the finance sector warranted? Evidence from financial adviser misconduct

Abstract

Using data from over one million financial advisers in the U.S., we estimate that up to 30% of advisers are involved in misconduct, but only about one-third of these cases are reported by regulators. Advisers with a high propensity for misconduct oversee approximately $6.9 trillion assets under management (AUM). The rates of adviser misconduct and unreported cases increase during the GFC, paralleling the decline of trust in financial institutions. One misconduct costs a firm nearly 9 clients and $14 million AUM annually. We provide a list of characteristics for consumers, advisory firms, and regulators to help identify adviser misconduct.

Keywords: Trust, financial advisers, financial misconduct, consumer finance

JEL Classification: G24, G28, D18