The regulator gave notice it will consider a proposal requiring advisors to be entirely upfront about how much money is involved in their decision to switch firms.
“The Board will consider a proposed rule that would require disclosure to transferring customers of recruitment compensation packages offered to induce registered representatives to move from one firm to another,” FINRA said.
The Securities and Exchange Commission first broached the subject in 1994 when then-Chairman Arthur Levitt tasked the Committee on Compensation Practices, a five-man team that included Warren Buffet, with examining conflicts of interest in broker-dealers. In the committee's summary, it found that bonuses or accelerated payouts could jeopardize the client relationship.
“Is the [registered representative] transferring because the new firm has better research or other advantages for serving investors, or is the [registered representative] simply aiming to maximize personal income?” they asked rhetorically. “Do accelerated payouts encourage the [registered representative] to increase the level of account activities--i.e., churn the accounts? Should up-front bonuses and accelerated payouts be disclosed to the client?”
Even the perception this is coming up for discussion once again could make advisors sweat, according to Mindy Diamond, president of Diamond Consultants.
“It’s less important to me whether or not it is fact or fiction- whether it happens and when it happens- as much as the raising of the issue again,” she said. “The fact that it’s on the minds of anybody at FINRA and the SEC in and of itself will have an impact on advisor recruitment.”
Diamond said that a number of advisors are on the fence waiting to move until the economics of their decision improve or their retention package with their current firm becomes more forgiving.
“Now it’s become even more of a crap shoot,” she said. “You wait, but what if the firms are forced to restructure deals that are now at a high water mark and are as broker-friendly as can be?”
For a long time, Diamond has advised clients that if they are considering a move, they should do so sooner rather than later.
“The thing that causes them to break out in a cold sweat or lose sleep is ‘Will my clients follow me?’ on a good day,” she explained. “So imagine now having to have the conversation that says ‘I’m moving for your benefit and I’d like you to join me. And by the way I was paid $3 million or $10 million as an incentive to do it. It’s a lot harder conversation to have.”
While Danny Sarch, president of Leitner Sarch Consultants, agrees that there are benefits to the compensation structure, he said that for the majority of brokers who have the client’s interests at heart, it will be a non-issue. He said that he has always encouraged full disclosure of those bonuses when advisors move.
“It comes down to can you justify the decision to your clients that this is better to them,” he said. “If the answer is yes, the disclosure means nothing. It makes you seem more above-board. It’s fine.”
It may be harder for some advisors, Sarch acknowledges, who may be embarrassed, but he said many advisors involved in these big deals are working with clients who have or make more money than them.
“Why would you be embarrassed or would you think they would be begrudged by you seeing an opportunity that is better to them, again, you would have to explain that, as well as better for you?” he asked.
Advisors who are moving for the money should just be up front, Sarch says, and just explain that it should be no better or worse for the client.
“You have to be able to at least say that,” Sarch said.
FINRA did not have any additional comment.