The report, entitled ‘The Market for Financial Adviser Misconduct’ authored by economists Mark Egan, Gregor Matvos and Amit Seru, draws on a database of the universe of financial advisers from 2005 to 2015, which represents around 10% of those working in the total US finance and insurance sector.
The report suggests prior offenders are five times as likely to engage in new misconduct as the average financial adviser.
It also points out conflicting attitudes to discipline by financial services firms, pointing out that roughly half of financial advisers lose their job following misconduct, only for 44% to be reemployed elsewhere in the financial services industry within one year.
Following cases of misconduct, advisers face longer unemployment spells and take positions at less reputable firms, often taking a 10% pay cut.
The report also found the firms hiring these advisers also had higher rates of prior conduct.
Two camps
The study also revealed firms fell broadly into two camps: those with persistent cases of misconduct and those with clean records, which the authors suggested might be due in part to differing levels of consumer sophistication.
“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 “specialise” in misconduct and cater to unsophisticated consumers, while others use their reputation to attract sophisticated consumers,” it said
