A new study finds that where financial advisors were raised plays a significant role in establishing their core code of ethics, which has a significant impact on their professional behavior as adults. Specifically, researchers found that where advisors grew up significantly predicted the likelihood that they engaged in professional misconduct as adults – regardless of whether they worked in the same area where they were raised.

“This study underscores that the environment we grow up in has a lasting impact on us as adults, and that efforts to promote ethical behavior in the financial advisor industry should take these cultural factors into consideration,” says Jesse Ellis, co-author of a paper on the work. Ellis is the Alan T. Dickson Distinguished Professor of Finance in North Carolina State University’s Poole College of Management.

“Previous research found one out of 13 financial advisors had committed at least one documented case of misconduct, and that advisors who committed misconduct generally stayed in the industry,” Ellis says. “The financial advisor sector is particularly subject to misconduct because clients usually lack the expertise necessary to assess the value of the product or service they’re getting. And that means advisors can engage in misconduct that allows them to make more money at the expense of their clients.

“Regulations aimed at limiting that misconduct can be difficult to enforce, which means that the primary protection against misconduct is each advisor’s commitment to ethical conduct,” Ellis says. “So, given the sector’s vulnerability to misconduct, we wanted to learn more about what may be influencing these unethical behaviors.”

For the study, researchers looked at data on 86,766 financial advisors, as well as data from 2,489 counties where those advisors grew up and 1,720 counties where those advisors worked as adults. The researchers also gathered information on each financial advisor’s history of misconduct from publicly available data collected by the Financial Industry Regulatory Authority (FINRA) and state regulatory agencies.

To assess the impact an advisor’s childhood environment may have had, the researchers made use of an index that was developed to measure “misbehavior.” That index looks at data on six categories of misbehavior: financial misconduct by corporations, local political corruption, financial advisor misconduct, stock option backdating, spousal infidelity, and inappropriate financial relationships between doctors and drug companies. Each county was assigned a score – the higher the score, the higher the level of misbehavior.

“We found there was a strong relationship between where advisors grew up and the likelihood that an advisor engaged in misconduct,” Ellis says. “Basically, the higher the misbehavior index score of an advisor’s hometown, the more likely it was that the advisor engaged in misconduct. This held true regardless of whether advisors worked in the same region where they grew up, and it held true even when we accounted for a host of demographic variables.

“This does not mean that someone from an area with a high misbehavior score is definitely going to behave unethically,” Ellis says. “However, it strongly suggests that the cultural norms where advisors grow up play a significant role in shaping their ethical foundations.

“We think the work we’ve done here drives home the extent to which ethical foundations are deeply ingrained in individuals, and that cursory ethical training efforts are insufficient to reduce misconduct,” Ellis says. “We’re optimistic these findings will lead policymakers and the business community to develop and implement more substantive efforts to influence advisor behavior in a meaningful way.”

The paper, “Childhood Exposure to Misbehavior and the Culture of Financial Misconduct,” is published in the Review of Financial Studies. The paper was co-authored by Chris Clifford and Will Gerken of the University of Kentucky.