Hiding in Good Times, Caught in Bad: Strategic Masking and the Delayed Detection of Financial Adviser Misconduct

Abstract

While financial misconduct in advisory services persists despite regulation, the demand-side of market discipline, specifically the timing of investor detection, remains a critical bottleneck. Using approximately 55,700 FINRA BrokerCheck records, we analyze the detection lag between misconduct inception and formal reporting. We document a conditional average lag of 28.5 months, with a fat-tail exceeding eight years. Overt unauthorized activity reduces the lag by 35.7%, whereas sophisticated fraud extends it by 58.6%. Using method of moments quantile regression, we reveal a strategic masking gradient: the impact of advisor experience more than doubles at the 90th percentile relative to the 10th. Product opacity acts as an expanding shield: insurance-linked disputes extend latency by by 61.9% at the 10th percentile and by 90.0% at the 90th percentile of the distribution. Finally, market volatility serves as an asymmetric catalyst for discovery: a doubling of the VIX reduces the lag by 21.1% for rapid-discovery cases, but only 7.9% for deeply concealed schemes. These strategically managed discovery delays allow bad types to persist across multiple market cycles.