M&A activity in wealth management is often touted for delivering scale, technology integration, and operational efficiencies. But a recent academic study highlights an unexpected upside: a sharp drop in employee misconduct at firms that are acquired.
According to new research from financial economists Heather Tookes and Emmanuel Yimfor, employee misconduct disclosures decline by 17% to 22% in the three years following a merger. The study, circulated this month by the National Bureau of Economic Research, examined 510 M&A transactions in the advisory space between 2011 and 2020. It compared FINRA disclosure records from three years pre-merger to three years post-merger at target firms.
The authors’ conclusion: the drop in misconduct isn’t due to cultural transformation or tougher compliance protocols. It’s largely because problematic advisors tend to leave after a deal closes.
“These employees don’t disappear—they just move on,” Tookes and Yimfor write. Advisors with prior misconduct histories are more likely to exit acquired firms, and many continue to exhibit elevated rates of violations after joining new employers.
For RIAs and wealth management leaders, the findings are a timely reminder of how M&A activity can act as a filter, effectively flushing out higher-risk individuals. But the talent migration also poses reputational and regulatory risks to the broader ecosystem, especially for firms hiring post-merger castoffs.
Among advisors who departed an acquired firm, those with misconduct records were significantly more likely to rejoin another firm within a year than their peers with clean records. That behavioral pattern should give pause to recruiters and practice leaders evaluating new hires during periods of industry consolidation.
The researchers relied on BrokerCheck, the public FINRA database, to track disclosures across 23 violation categories. Their findings remained statistically significant even when narrowing the focus to six categories of more severe infractions—such as customer disputes resolved through settlement or arbitration and involuntary terminations related to misconduct.
Interestingly, both acquiring and target firms generally had fewer misconduct disclosures than the broader industry baseline before a deal. The researchers suggest multiple possible explanations: acquirers may be avoiding high-risk firms due to liability exposure, or M&A partners may be selecting each other based on cultural alignment and shared compliance values.
However, a cautionary trend emerged as well: firms with higher rates of misconduct are more likely to merge with similarly high-risk peers. This behavioral clustering implies that misconduct-prone firms may seek each other out, while firms with stronger cultures of compliance look to preserve their standards through careful dealmaking.
That raises a strategic consideration for RIAs expanding through acquisition. Due diligence on advisor conduct records—not just firm-level compliance metrics—can provide valuable insight into the post-merger cultural landscape and potential integration challenges. For multi-location RIAs with aggressive roll-up strategies, avoiding toxic hires from previously acquired teams should be a top priority.
The study also highlights a persistent structural challenge: bad actors remain in circulation across the industry. Even as individual firms clean house through acquisitions, the industry at large continues to recycle misconduct-prone advisors—often without meaningful remediation or oversight.
As regulatory scrutiny tightens and investors place more emphasis on firm reputation and advisor integrity, these dynamics could become even more consequential. Advisory firms will need to weigh not only the strategic benefits of a deal but also the reputational cost of onboarding individuals with questionable records.
For RIAs considering inorganic growth, the message is clear: a merger can bring operational scale and improved compliance—but only if supported by rigorous advisor-level vetting and thoughtful post-merger integration. And for firms hiring talent post-acquisition, a clean break may be preferable to inheriting someone else's problem.
