Ethical firms are more likely to merge
In the US, independent financial adviser misconduct is recorded in a centralised database accessible to every consumer. This provides a simple background check for every investor on their broker. But it can also tell us something about how investment advisory firms deal with unethical employees and what happens after a merger with another firm.
Heather Tookes and Emmanuel Yimfor used the mergers of investment advisory firms in the US with more than 15 employees or more than $25m in assets under management since 2009 to examine misconduct in these firms before and after a merger. Does the change in top-level management change the behaviour of investment advisers?
One of the interesting findings, in my view, is that merger activity is not random when it comes to ethical practices of businesses. Investment advisory firms that merge tend to have fewer ethical complaints than investment firms that do not merge. Indeed, deeper analysis indicates two things that drive this result. First, acquirers tend to shy away from targeting companies with a poor ethics track record for fear of fines and penalties for the combined entity. Second, targeted firms tend to resist an acquisition from a firm with a poor ethics track record because of the cultural mismatch.
Employee disclosure events and advisory firm mergers
Source: Tookes and Yimfor (2025)
Moreover, the merged firm experiences a significant decline in ethics violations in the years after the merger (some 17% to 22%). The driver here is that after practically every merger, some people will be made redundant, and the combined firms tend to disproportionately fire employees with ethics complaints against them.
Significant decline in ethics violations after a merger
Source: Tookes and Yimfor (2025)
That’s the good news.
The question then is why ethics violations persist in the investment advisory industry. If unethical employees are more likely to lose their jobs, why does that not eradicate ethics violations in the industry overall?
Unfortunately, the study also confirmed an older result from this paper that showed that employees with lots of ethics violations get hired by other firms in the industry. In fact, unethical employees tend to gravitate towards larger firms, while smaller, independent firms often cannot afford to have unethical employees among their ranks because they could become a ruinous reputational risk.
Indeed, there is a kind of self-sorting among firms where some firms disproportionately attract employees with many ethics violations. Over time, the industry thus splits into companies with high integrity and companies with a lack of integrity.