Can financial advisors and traders be taught to be ethical?

A recent study from the University of Notre Dame has examined whether ethics training works and whether it impacts on behaviour in the financial services industry.

The research offers the first large-sample study on how rules and ethics training affects behaviour and employment decisions in the financial sector.

Zachary Kowaleski, assistant professor of accountancy in the University of Notre Dame’s Mendoza College of Business, along with Andrew Sutherland from the MIT Sloan School of Management, and Felix Vetter, a doctoral candidate at the London School of Economics, carried out the study of nearly 1.2 million investment advisers and financial representatives working at US broker dealers.

Their study spanned 10 years and focused on a 2010 change in the investment advisor qualification exam which saw emphasis shift from rules and ethics (80% of the paper before the change, 50% after) to technical questions.

Kowaleski notes it’s surprising to see an effect.

'Behavioral ethics research shows that business people often do not recognize when they are making ethical decisions,' he says. 'They approach these decisions by weighing costs and benefits, and by using emotion or intuition.'

These results are consistent with the exam playing a 'priming' role, where early exposure to rules and ethics material prepares the individual to behave appropriately later. Those passing the exam without prior misconduct appear to respond most to the amount of rules and ethics material covered on their exam. Those already engaging in misconduct, or having spent several years working in the securities industry, respond least or not at all.

The study also examines what happens when people with more ethics training find themselves surrounded by bad behaviour, revealing these individuals are more likely to leave their jobs.

'We study this effect both across organizations and within Wells Fargo, during their account fraud scandal,' Kowaleski explains. 'That those with more ethics training are more likely to leave misbehaving organizations suggests the self-reinforcing nature of corporate culture.'