Misconduct and Market Implications of Honest Advisers’ Decisions

Michael Gelman and Amir Shoham

♦ Most financial advisers have no history of misconduct, yet little is known about how honest advisers respond to misconduct at their firms. In this paper, we show that honest advisers are more likely to leave firms experiencing elevated misconduct and transition to firms with lower tolerance for misconduct.  We demonstrate that in an industry where reputation and trust are central, affiliation with a firm experiencing higher misconduct generates reputational spillovers. These individual decisions of honest advisers aggregate to the market level, contributing to the sorting of honest (dishonest) advisers into firms that are less (more) tolerant of misconduct.

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