DD Support Board and Research Team

[scion]

Our mystery begins with a clever working paper called “The Market for Financial Adviser Misconduct.”
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2739170

https://www.nytimes.com/2016/11/19/your-money/brokerage-and-bank-accounts/trump-repeal-retirement-rules-brokers-madison-county.html?_r=0

The Market for Financial Adviser Misconduct

Mark Egan
University of Minnesota Carlson School of Management

Gregor Matvos
University of Chicago - Booth School of Business

Amit Seru
Stanford University

March 1, 2016


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. Roughly 7% of advisers have misconduct records. 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 job after misconduct. The labor market partially undoes firm-level discipline: of these advisers, 44% are reemployed in the financial services industry within a year. Reemployment is not costless. Following misconduct, advisers face longer unemployment spells, and move to less reputable firms, with a 10% reduction in compensation. Additionally, firms that hire these advisers also have higher rates of prior misconduct themselves. We find similar results for advisers of dissolved firms, in which all advisers are forced to find new employment independent of past misconduct or performance. Firms that persistently engage in misconduct coexist with firms that have clean records. We show that differences in consumer sophistication may be partially responsible for this phenomenon: misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations, and high incomes. Our findings suggest that some firms "specialize" in misconduct and cater to unsophisticated consumers, while others use their reputation to attract sophisticated consumers.


Number of Pages in PDF File: 61

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

JEL Classification: G24, G28, D14, D18

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2739170