The Market for Financial Adviser Misconduct

We construct a novel database containing the universe of financial advisers in the US 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 10% smaller compensation. We find “matching on misconduct:†these firms also have higher rates of prior misconduct. Firms who persistently engage in misconduct coexist with firms clean records. We show differences in consumer sophistication may be partially responsible for this phenomenon: misconduct is concentrated in firms with retail customers and in counties 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.