A very large library could be filled with books about what makes people ethical. Are we blank slates on which right and wrong are engraved? Are we born with a moral code? When do we heed our values and when do we ignore them? Philosophers, sociologists, political scientists, and religious leaders stretching back millennia have all weighed in.
Now add two accounting professors and a PhD candidate to the mix., an associate professor at MIT Sloan, along with Zach Kowaleski from Notre Dame and Felix Vetter from the London School of Economics, recently completed an empirical study of ethics education among financial advisers. By studying a 2010 change to the Series 66 exam, which certifies advisers, they were able to demonstrate that ethics in this sector can, in fact, be taught — and very effectively.
The Series 66 has two sections. One focuses on rules and ethics of investment — what, for instance, are accepted and prohibited business practices — and the other section focuses on technical material, like capital market theory and characteristics of specific investment vehicles. Before January 1, 2010, 80% of the exam focused on ethical questions and 20% on technical questions. Starting in 2010, the split became 50-50. This change allowed Sutherland and his colleagues to compare individuals who took different versions of the exam but were otherwise similar in terms of employer, location, qualifications, and experience.
Financial advisers who passed an exam focused on ethics were 25% less likely to commit any kind of misconduct.
The central finding is striking: those passing the older exam, with more rules and ethics coverage, were 25% less likely to commit any kind of misconduct. Aware that this discrepancy could be attributable to knowledge of, rather than respect for, ethical rules, the researchers also studied cases like fraud and theft, in which the egregiousness of the misconduct would make it an obvious breach of ethics. In these cases, too, a significant and persistent difference appeared between takers of the new and old exams, suggesting that the change to the exam actually altered advisers’ perceptions of acceptable conduct.
“People often question the possibility of teaching ethics, and some of that doubt comes down to whether we’ve got explicit instruments to actually further that education,” said, a senior lecturer in leadership and ethics at MIT Sloan. “The authors in this case identified how to measure the effect of a change in an exam and found something reassuringly concrete. I was delighted that these were the results.”
Behavior of the least experienced financial advisers proved most sensitive to ethics testing. Those advisers who already had experience were less responsive, and those who had a prior history of misconduct, or who worked in firms where misconduct was prevalent, were often completely unaffected by the ethics exam, whether new or old. At the firm level, the researchers suggest that the “contagion of misconduct” dampens the power of ethics training.
Related to this, Sutherland and his colleagues studied turnover among Wells Fargo advisers and found that those who took and passed the old Series 66, in which ethics were more heavily weighted, were also more likely to leave after the recent scandal related to fraudulent accounts went public. Those with more ethics training appear less likely to tolerate the bad behavior of their employer. Moreover, the departure of advisers who had taken the old exam actually predicted scandal at their former employers: Financial advisers who passed the old exam were 6.5% more likely to leave firms with major scandals and misconduct on the horizon.
Within the financial sector, the implications are straightforward: “The exam appears to affect advisers’ perception of acceptable conduct, and not just their awareness of specific rules,” Sutherland said. This is a key takeaway, given “advisers play an important role in helping households access financial markets, and represent one of the largest financial sector occupations in the United States.”
Hafrey noted that the findings bear consideration beyond the world of finance. “These results serve as a cautionary tale or sound a cautionary note for people who manage ethics exams and might be thinking about elaborating a new form or edition,” he said. “And if the results of the study are reproducible, then they would serve as a model for a more explicit address to ethics in various business settings, not just finance; the article has a much broader application in the name of ethics education.”