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Financial Advisers: Quite the Unsavory Lot? (Part 1)

Whenever money is involved, it seems like fraud is not too far behind. Mark Egan, Gregor Matvos, and Amit Seru have recently added fuel to the fire with a 61-page article published Feb 2016.

Egan et al. write:

     > [from] Luigi Zingales in his American Finance Association
     > presidential address: “I fear that in the financial sector fraud
     > has become a feature and not a bug.” This perception has been
     > shaped by highly publicized scandals that have rocked the
     > industry over the past decade. While it is clear that egregious
     > fraud does occur in the financial industry, the extent of
     > misconduct in the industry as a whole has not been
     > systematically documented.

I am now going to discuss the abstract.

     > 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. Roughly 7% of advisers have misconduct records. Prior

7% seems astonishingly high to me but I would offer two caveats.

First, while this research is significant in assigning hard numbers for perhaps the first time, I don’t have a point of reference. Pharmacists steal narcotics, physicians commit insurance fraud, and lawyers violate due process guidelines. Most any profession that has an ethics board (Realtors too) has dealt with significant misconduct. I really need to see these numbers from other industries to have a better context for the current article.

The second caveat is that our authors have lumped the finance and insurance sectors together. We therefore don’t know to what extent the two separately contribute. This seems like a significant qualification of many conclusions we might possibly take from the article.

     > offenders are five times as likely to engage in new misconduct
     > as the average financial adviser. Firms discipline misconduct:

With a rate of recidivism that high, why are these advisers even allowed to remain a part of the industry once they have been found guilty? Maybe if this research has significant impact they no longer will. Then again, since nobody knows if this is more a comment on the financial or insurance industry, perhaps nobody should take it seriously at all.

     > approximately half of financial advisers lose their job after
     > misconduct… of these advisers, 44% are reemployed in the
     > financial services industry within a year…

I would think lifetime bans for misconduct could go a long way toward cleaning this up.

I’ll continue in the next post.

Comments (3)

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