The Market for Financial Adviser Misconduct

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. 7% of advisers have misconduct records, and this share reaches more than 15% at some of the largest advisory firms. Over a 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. We examine the labor market consequences of misconduct. Firms discipline misconduct: approximately half of financial advisers lose their job 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 show that differences in consumer sophistication may be partially responsible for firm differences in misconduct propensity. Misconduct is concentrated in 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 using their clean reputation to attract sophisticated consumers.