Ep. 82: Service quality in the financial advisory industry

AEA Research Highlights

A growing number of US households hire advisers to assist with major financial decisions, such as planning life events or making portfolio choices for retirement. But some advisers exploit the inherent complexity of these decisions and the lack of sophistication of their clients to benefit themselves.

In a paper in the Journal of Economic Perspectives, Mark Egan, Gregor Matvos, and Amit Seru show that about 7 percent of financial advisers have serious misconduct records, with rates reaching nearly 30 percent in some regions and firms. The authors explain why misconduct clusters in certain firms and geographic areas, particularly those with wealthy but less financially sophisticated populations.

Importantly, the researchers also show that widely publicizing the names of the firms with the highest misconduct rates can lead to a substantial reduction in misconduct.

Egan recently spoke with Tyler Smith about how the complex regulatory landscape of financial advising creates potential confusion for consumers and the best ways to clean up the industry.