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Is Fraud Contagious Among Financial Advisors?

Posted on September 18, 2019 by Doug Cornelius
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Yes.

Perhaps it’s useful to have some data behind that “yes.”

Stephen G. Dimmock, William Christopher Gerken, and Nathaniel Graham looked at 477 financial firm mergers between 1999 and 2011 with multiple branch offices in overlapping cities. They used Form U4 to identify mass transfers of employees in the same city. They also used the disciplinary data from the U4 to measure misconduct in the newly merged offices where there had been overlapping offices. They could use the non-merged offices as control groups.

The study found evidence of co-worker influence on misconduct committed by financial advisors, controlling for merger-firm fixed effects and using changes to an advisor’s co-workers due to a merger. They determined that a financial advisor is 37% more likely to commit misconduct if his new co-workers have a history of misconduct.

Additional tests show that co-worker influence is asymmetric. There is evidence of contagion in misconduct, but no significant evidence of contagion in good conduct.

Bad seeds spread their badness.

Sources:

  • Dimmock, Stephen G. and Gerken, William Christopher and Graham, Nathaniel, Is Fraud Contagious? Co-Worker Influence on Misconduct by Financial Advisors (June 20, 2017). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2577311 or http://dx.doi.org/10.2139/ssrn.2577311

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