Patterns of How the Financial Industry Tolerates Misconduct: Birds (and Advisers) of a Feather Flock Together

Financial Misconduct

This paper helps demonstrate how it is not enough for plan fiduciaries to rely on regulatory rules to protect against predatory behavior; as in so many horror movies, the predator is already inside the house.

A recent paper, The Market for Financial Adviser Misconduct (Journal of Political Economy, Publication Forthcoming), raises some important – and troubling – issues about how the financial industry treats advisers who engage in serious misconduct. The paper shows a number of different ways that adviser misconduct is concentrated – among repeat offenders, certain financial firms and geographically. In effect, the paper shows how the financial industry tolerates adviser misconduct.

This paper helps demonstrate how it is not enough for plan fiduciaries to rely on regulatory rules to protect against predatory behavior; as in so many horror movies, the predator is already inside the house.


The authors took a comprehensive look at the financial industry by constructing a database of all financial advisers registered in the United States from 2005 – 2015. The database represented information on 1.2 million financial advisors and combined information from the FINRA BrokerCheck site (which lists regulatory actions taken against advisers) and brokerage firms’ SEC filings. The database includes all individuals registered as brokers in the U.S. and the vast majority (over 80%) of investment advisers. In effect, the study represents an unprecedented look at the financial industry and the behavior of financial advisers.

Here are some of the more significant (and troubling) findings:

•      Approximately one-quarter of advisers with misconduct records (representing more serious charges) are repeat offenders. Advisers with a misconduct charge are five times more likely to engage in misconduct than the average adviser.

•      Advisers with misconduct records cluster in certain advisory firms. At the high end, at some firms more than one in three (client facing) advisers have a record of misconduct, while at the lower end the ratio is roughly one in thirty-six. Also, advisers working for firms whose executives and officers have records of misconduct are more than twice as likely to engage in misconduct.

•      Forty four percent of advisers who lost their jobs after misconduct find employment in the industry within a year. Notably, this is close to the 52% reemployment rate for advisers who left their firms with no record of misconduct.

•      Advisers with misconduct switch to firms that employ more advisers with past misconduct records. In effect, there is matching between advisers who have engaged in misconduct and firms who are willing to tolerate a record of misconduct in hiring advisers. Correspondingly, the firms that hire more advisers with misconduct records are also less likely to fire advisers for new misconduct.

•      Rates of misconduct are higher in counties with the most vulnerable populations: those counties with concentrations of the elderly and those counties that rank below the national averages in terms of household incomes and college education rates.

These are not statistical anomalies. Rather, they are strong evidence that the financial industry implicitly tolerates adviser misconduct and that certain firms have created a secondary market for advisers who engage in misconduct.


This study has implications for both individuals are retirement plan fiduciaries.

•      Individuals are already confused by the different roles and different labels used by financial professionals, and it is hard to fully understand the differences between a broker, an adviser and a planner. This study is a stark reminder that, in sorting through these labels, individuals cannot rely on registration with a regulatory agency (such as FINRA or the SEC) to determine who to trust.
•      Plan fiduciaries already face a challenge in performing “routine” fiduciary duties – such as monitoring investment performance and plan fees. The study serves as a reminder that fiduciaries need to dig a bit deeper in selecting a firm to provide plan information – and, in effect, financial advice, to participants.