ABSTRACT

We study the market for professional certifications in the financial advisory industry, where more than 200 designations compete to signal adviser quality. Consistent with classic signaling models, certifications that are more costly to obtain are associated with substantially lower rates of adviser misconduct. Yet we also document a large number of low-cost, low-rigor certifications that are associated with higher rates of adviser misconduct. Strikingly, certifications that impose a fiduciary standard, which requires advisers to act in their clients’ best financial interest, are associated with higher rather than lower misconduct, contrary to the assurance such standards are meant to provide. The prevalence of seemingly frivolous certifications is difficult to reconcile with traditional signaling models. We argue that this pattern arises from free entry among certifiers and limited consumer sophistication. In a structural model of certification demand and supply, we show that competition among certifiers creates incentives to lower standards when households struggle to distinguish between high- and low-quality certifications. Counterfactual simulations suggest that requiring certifications to meet standards similar to existing regulator-approved credentials could reduce misconduct among certified advisers by roughly 40 percent. Our findings suggest how unregulated certification markets can give rise to market failures in credentialing, with implications for disclosure, market design, and professional regulation.

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