Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks
Wolf in the hen house? Check advisor backgrounds
Law, K. K. F., and Mills, L. F. (2019). Financial gatekeepers and investor protection: Evidence from criminal background checks. Journal of Accounting Research, 57(2), 491-543.
Key takeaways:
Financial advisors with criminal records prior to becoming advisors pose a significantly higher risk to investors, being over 30% more likely to later have customer complaints and engage in misconduct.
Investors who use advisors with pre-advisor criminal histories are not compensated with better returns or lower fees, but do face a higher chance of their advisor being disciplined and barred from the industry.
Brokerage firms that hire advisors with criminal backgrounds are more likely to be expelled or have their licenses revoked, forcing clients to find new firms and advisors.
Criminal history, even from many years before becoming an advisor, is a meaningful red flag for regulators, employers, and investors to consider when evaluating an advisor’s trustworthiness and risk.
