“Do Financial Gatekeepers Under-Protect Investors? Evidence from Criminal Background Checks” by Dr. Kelvin Law
Accounting & Law Seminar
Dr. Kelvin Law
Assistant Professor of Accounting
Nanyang Business School
Nanyang Technological University
Does hiring financial advisors with pre-existing criminal records pose higher risk for investors? Given that 2.3% of financial advisors that have criminal records, the potential for harm is more than remote. We find that financial advisors with pre-advisor criminal records are 32% more likely to receive future customer complaints. Their complaints are 28% more likely to receive arbitration awards or settlements and 63% more likely to involve large settlements exceeding $100,000. Customers are also 200% more likely to complain about their behavior and allege fraud—the most serious allegation—than other reasons. Our results flag financial advisors with pre-existing criminal records—even when the advisors are not convicted—as high-risk individuals. Regulators appear to underestimate the risk of these advisors. Investors also should demand greater protection when dealing with advisory firms that employ individuals with pre-advisor criminal records, even if their own advisors have no criminal records, because such firms are more likely to have their licenses canceled or be expelled from the securities industry.