Understanding Financial Advisor Misconduct

Households rely on financial advisors to make investment and savings decisions. Despite their importance, there have long been concerns that financial advisors are prone to misconduct, and research has shown that these concerns are not unfounded. In this article, we examine the literature on advisor misconduct, its causes, and potential policy solutions. We also present new suggestive evidence that increased disclosure and more rigorous licensing exams may help reduce misconduct. Misconduct is lower in regions where households make greater use of BrokerCheck, a public website that provides the career and disclosure histories of advisors. Furthermore, we find that advisors who perform poorly on licensing exams that test knowledge of regulations and ethics are more likely to engage in misconduct in the future. We conclude by discussing how advancements in technology and artificial intelligence have changed, and may further transform, the landscape of financial advising and misconduct.