Three Essays on the Financial Advisory Industry: Diversification, Competition, and Misconduct

Abstract

The first chapter examines how the geographic diversification of financial advisory firms influences adviser misconduct. We find that diversification significantly increases both misconduct and customer complaints. This effect is robust to alternative diversification measures and persists after addressing endogeneity concerns related to firms' non-random expansion decisions. The impact is strongest immediately after branch openings and in remote, small, or newly established branches. However, the effect weakens when branches are located near regulatory offices. These findings underscore the governance challenges associated with geographic expansion, offering the first empirical evidence on the consequences of geographic expansion in the financial advisory industry. The results have practical implications for firms seeking to balance growth with internal controls and service quality.

The second chapter investigates how the adoption of the Broker Protocol, a voluntary non-solicitation agreement among financial advisory firms, shapes competition in local financial advisory markets. We find that a higher share of Protocol-member firms intensifies local market competition, leading to greater talent mobility. Firms that join the Protocol experience significant growth in Assets Under Management (AUM) and employment. However, larger firms face a talent drain as advisers disproportionately move to smaller competitors. These results highlight the Protocol's role in reallocating human capital toward smaller firms, thereby reshaping local competitive dynamics in the industry.

The third chapter examines how early-career exposure to high-misconduct financial advisory firms shapes advisers' long-term professional conduct. We find that advisers who start their careers at such firms are more likely to engage in subsequent misconduct, face a greater likelihood of being barred from the industry, and experience prolonged job transitions. The effect on subsequent financial misconduct remains even after controlling for endogeneity. These results provide robust evidence of negative career imprinting, demonstrating how early professional environments exert a lasting influence on ethical behavior. The findings underscore the need for targeted interventions, such as enhanced supervision of early-career training and mentorship, to disrupt cycles of misconduct in the financial advisory industry. Show more