Key takeaways
- Financial advisors with criminal records are more likely to engage in misconduct
- Mandatory background check requirements reduce investor harm
- Past personal behavior predicts professional misconduct
- Screening mechanisms can protect investors from bad actors
- The findings support strengthening financial gatekeeper requirements
The research question
Who becomes a financial advisor? And does their past predict their future behavior with clients' money?
We examine whether criminal background checks of financial advisors protect investors. This is a direct test of whether past behavior predicts professional misconduct.
What we found
Advisors with criminal records before entering the profession are significantly more likely to commit professional misconduct. The effect is economically meaningful: a criminal record roughly doubles the probability of future investor harm.
When states mandate criminal background checks, the pool of advisors changes. Firms become more selective, and investor complaints decline.
Policy implications
Background checks work. They screen out individuals who are more likely to harm investors. Regulators should consider strengthening these requirements across the financial services industry.
The broader lesson: personal character matters for professional conduct. Gatekeeping mechanisms that assess character can protect the public.
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