CBR Briefing #60

How financial firms tolerate misconduct
At some firms, more than 15 percent of advisers have a record of misconduct

Misconduct is concentrated in firms that cater to small retail investors.

In the first large-scale study documenting the economy-wide extent of misconduct among financial advisers in the United States, research by University of Minnesota’s Mark Egan and Chicago Booth’s Gregor Matvos and Amit Seru finds that some of the largest financial advisory firms have the highest rates of misconduct (see chart).
The researchers created a database of all financial advisers in the United States registered at the Financial Industry Regulatory Authority from 2005 to 2015, representing about 10 percent of employees in the finance and insurance sectors. The data reveal that about 7 percent of active advisers have been disciplined for fraud or other wrongdoing. Of this number, 38 percent are repeat offenders.
More than half of misbehaving advisers stay with the same firm after a year, according to the data. Of those who lose their jobs, 44 percent find new jobs in the industry within a year, likely at smaller firms that employ other advisers with past records of misconduct, according to the researchers.
The advisers could be targeting markets with less sophisticated investors. The research indicates that misconduct is concentrated in firms that cater to small retail investors, and is widespread in areas with relatively high incomes, low education levels, and elderly populations.

Works Cited

Mark Egan, Gregor Matvos, and Amit Seru, “The Market for Financial Adviser Misconduct,” Working paper, March 2016.

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