Real Estate Shocks and Financial Advisor Misconduct

Abstract

We test whether personal real estate shocks affect professional misconduct by financial advisors. We use a panel of advisors' home addresses and examine within‐advisor variation relative to other advisors who work at the same firm and live in the same ZIP code. We find a negative relation between housing returns and misconduct. We show that advisors' housing returns explain misconduct against out‐of‐state customers, breaking the link between customer and advisor housing shocks. Furthermore, the results are stronger for advisors with lower career risk from committing misconduct, and for advisors with greater borrowing constraints.

Household finance and housing markets

“…Third, although the timing of moving-in is usually regarded as orthogonal to other household decisions, such as mortgage repayment (Gerardi et al, 2018) and misconduct (Dimmock et al, 2021), in our settings, the timing of moving-in might be driven by the expectations, a possibility suggested by Kurlat and Stroebel (2015).…”

“…Third, in the related literature, the timing of purchase, which is the key determinant of the cumulative return within a certain local market, is regarded as orthogonal to the household's current decisions, isolating the causal effect of house value on household decisions. For example, Dimmock et al (2021) use financial advisors' cumulative returns on their property since purchase to identify the causal effect of house prices on their propensity of misconduct. Chetty et al (2017) instrument for the house value with the regional house price index in the purchasing year to overcome endogeneity biases in the correlation between house value and real estate wealth.…”

“…Third, in the related literature, the timing of purchase, which is the only determinant for the cumulative return within a certain local market, is regarded as orthogonal to the household's current decisions, which helps isolate the causal effect of house value on household decisions. For example, Dimmock et al (2021) exploit financial advisors' cumulative returns since purchase to identify the causal 3 Households can find out about the WOZ value in two ways. First, when municipal taxes are determined and to be paid, homeowners will receive a letter from the municipality that states the WOZ value of the house and the amount of taxes due.…”

Conflitos de interesse na relação investidor-assessor no Brasil

“…Outro conflito de interesse observado é a "realização de operações sem aval do cliente", que está relacionado a assessores que fazem operações de trading, por exemplo, sem autorização do investidor, uma prática ilegal que expõe tanto cliente quanto empresa contratante do assessor a riscos financeiros e regulatórios (DIMMOCK; GERKEN; VAN ALFEN, 2021).…”

“…Quanto ao tipo de atuação, é evidente que os conflitos relacionados à realização de operações sem aval do cliente, isto é, quando o profissional movimenta os recursos financeiros do investidor sem autorização (DIMMOCK; GERKEN; VAN ALFEN, 2021), tende a ser menor entre os agentes sem previsão legal para operacionalizar os investimentos, ou seja, que atuam apenas com recomendação.…”