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Publications
  • February 2019
  • Article
  • Journal of Political Economy

The Market for Financial Adviser Misconduct

By: Mark Egan, Gregor Matvos and Amit Seru
  • Format:Print
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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. We provide the first large-scale study that documents the economy-wide extent of misconduct among financial advisers and the associated labor market consequences of misconduct. Seven percent of advisers have misconduct records, and this share reaches more than 15% at some of the largest advisory firms. Roughly one-third of advisers with misconduct are repeat offenders. 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 jobs after misconduct. The labor market partially undoes firm-level discipline by rehiring such advisers. Firms that hire these advisers also have higher rates of prior misconduct themselves, suggesting "matching on misconduct." These firms are less desirable and offer lower compensation. We argue that heterogeneity in consumer sophistication could explain the prevalence and persistence of misconduct at such firms. Misconduct is concentrated at firms with retail customers and in counties with low education, elderly populations, and high incomes. Our findings are consistent with some firms "specializing" in misconduct and catering to unsophisticated consumers, while others use their clean reputation to attract sophisticated consumers.

Keywords

Financial Advisors; Brokers; Consumer Finance; Financial Misconduct And Fraud; FINRA; Financial Institutions; Crime and Corruption; Organizational Culture; Personal Finance; Financial Services Industry

Citation

Egan, Mark, Gregor Matvos, and Amit Seru. "The Market for Financial Adviser Misconduct." Journal of Political Economy 127, no. 1 (February 2019): 233–295.
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About The Author

Mark L. Egan

Finance
→More Publications

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    • June 2022
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    The Use and Misuse of Patent Data: Issues for Finance and Beyond

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    The Cross Section of Bank Value

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    • May 2022
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    When Harry Fired Sally: The Double Standard in Punishing Misconduct

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More from the Authors
  • The Use and Misuse of Patent Data: Issues for Finance and Beyond By: Josh Lerner and Amit Seru
  • The Cross Section of Bank Value By: Mark Egan, Stefan Lewellen and Adi Sunderam
  • When Harry Fired Sally: The Double Standard in Punishing Misconduct By: Mark Egan, Gregor Matvos and Amit Seru
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