Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
The Problem of Good Conduct among Financial Advisers
Journal of Economic Perspectives
vol. 38,
no. 4, Fall 2024
(pp. 193–210)
(Complimentary)
Abstract
Households in the United States often rely on financial advisers for investment and savings decisions, yet there is a widespread perception that many advisers are dishonest. This distrust is not unwarranted: approximately one in fifteen advisers has a history of serious misconduct, with this rate rising to one in six in certain regions and firms. We explore the economic foundations of the financial advisory industry and demonstrate how heterogeneity in household financial sophistication and conflicts of interest allow poor financial advice to persist. Using data on the universe of financial advisers and the Survey of Consumer Finances, we document who uses financial advisers and the prevalence of misconduct in the industry. Our findings suggest that a lack of financial sophistication is a key friction, making enhanced disclosure a potentially effective policy response. Supporting this, we show through a difference-in-differences approach that "naming and shaming" firms with high misconduct rates was associated with a 10 percent reduction in misconduct.Citation
Egan, Mark, Gregor Matvos, and Amit Seru. 2024. "The Problem of Good Conduct among Financial Advisers." Journal of Economic Perspectives, 38 (4): 193–210. DOI: 10.1257/jep.38.4.193Additional Materials
JEL Classification
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- L84 Personal, Professional, and Business Services
- L88 Industry Studies: Services: Government Policy
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