Forensic Finance
Financial Advisor Misconduct
The Third Area of Topic
Financial advisor misconduct deals with the prevalence and forms of misconduct among financial advisors, with common infractions including unsuitable securities, misrepresentation, unauthorized activity, and fraud. Studies also show that disclosure of past regulatory violations can predict future fraud risk and that stronger ethics components in exams reduce the likelihood of misconduct

Financial Advisor Misconduct Overview
I.
The Impact of Financial Advisor Misconduct
Recent forensic finance research has highlighted the widespread issue of financial advisor misconduct, with significant practical implications. Pioneering studies by Mark Egan, Gregor Matvos, Amit Seru, and separately, Stephen Dimmock and William Gerken, have revealed alarming patterns. For instance, Dimmock, Gerken, and Graham (2018) found that financial fraud among advisors is contagious, with those working alongside advisors with a history of misconduct becoming 38% more likely to commit fraud themselves. Egan, Matvos, and Seru (2019) discovered that seven percent of financial advisors have misconduct on their records, with some firms seemingly specializing in hiring such individuals. The public exposure of these findings has led to increased regulatory scrutiny and reforms aimed at curbing these unethical practices.
II.
Gender and Regulatory Challenges in Financial Misconduct
Research has also uncovered gender disparities and regulatory shortcomings in addressing financial advisor misconduct. Egan, Matvos, and Seru (2022) found that male advisors are more likely to engage in misconduct, yet women face harsher consequences, being more frequently fired and less likely to be rehired after such incidents. These disparities are less pronounced in firms with more female or minority employees, suggesting a bias in how misconduct is treated. Furthermore, studies have shown that regulatory bodies like FINRA may expunge valid misconduct reports, allowing advisors to continue their practices under state regulation. This highlights the need for more consistent and transparent regulatory practices to protect consumers from unethical advisors.
III.
Opaque Markets and Potential for Further Misconduct
The issue of misconduct extends beyond financial advisors to other retail financial advice areas, particularly in opaque markets. Research has shown that brokers often engage in practices that are not in the best interest of their clients, such as selling products with higher commissions or engaging in strategic pricing that exploits market power. For instance, Egan (2019) found that brokers frequently sell inferior products like reverse convertible bonds, which may violate fiduciary duties. Similarly, Barbu (2023) uncovered that insurance companies often exchange customers out of favorable terms in variable rate structured notes, costing them billions. These findings indicate that many other less transparent markets could be ripe for further examination and regulation.
Relevant Papers
The Market for Financial Adviser Misconduct
Egan Et Al. (2018)
When Harry Fired Sally: The Double Standard in Punishing Misconduct
Egan Et Al. (2022)
Ex-Post Loss Sharing in Consumer Financial Markets
Barbu (2023)
Is Fraud Contagious? Co-Worker Influence on Misconduct by Financial Advisors
Dimmock Et Al. (2017)