Economists Mark Egan, Gregor Matvos and Amit Seru have an eye-opening new academic research paper on the “market for financial adviser misconduct.” They use data on all 1.2 million people who registered as financial advisers between 2005 and 2015 and come up with some startling results.
Many, many financial advisers have been disciplined for misconduct, some repeatedly. These advisers are more likely to be fired — but many of them go on to find jobs at other firms.
Egan, Matvos and Seru’s data suggest that there are two very different employment markets for financial advisers. One of them provides legitimate advice (although there are arguments — see below — that this advice usually isn’t as good as it ought to be). This market is far less likely to employ people who have been disciplined for misconduct. The other market employs advisers who are then matched with unsophisticated consumers who often may not realize that they are getting bad advice. Here’s how it works.
There are plenty of bad apples in the financial advice industry
Egan, Matvos and Seru’s headline finding is stark. Fully 7.28 percent of financial advisers have been disciplined for misconduct. This figure is substantially higher in some parts of the United States. In many counties in Florida and California, about 1 in 5 financial advisers have been found to have engaged in misconduct. In Madison County, N.Y., 1 in 3 have been disciplined for misconduct.
In the aggregate, the wealthier, the more elderly and the less educated a county is, the higher the likelihood that financial advisers have engaged in misconduct. While one has to be careful in interpreting aggregate results like this, they match with what you might expect. The more rich people there are, the more lucrative opportunities there are for misconduct (although it might also be that richer people are more likely to keep track of their money and complain when they believe it is being invested badly). The more elderly and poorly educated people there are, the more “financially unsophisticated investors” (i.e., suckers) there are to prey upon.
Read the full piece at The Washington Post.