By now, I trust that you are aware of the FINRA proposed rule to "require disclosure of conflicts of interest relating to recruitment compensation packages." The proposal put forth by Regulatory Notice 13-02 states that disclosure would need to be prominent and give details of the transitional compensation package, including signing bonuses, loans, accelerated payout, and back-end bonuses. FINRA is further suggesting that these details be presented both orally by the advisor and in writing by the firm as a prerequisite for transferring retail clients' accounts to the new firm.
I personally oppose this proposal believing it violates the privacy right of advisors who are non-public individuals. I find it yet another symptom of the anti-business trend in America, which tends to villanize success.
It is rather ironic that successful actors and athletes who receive enormous paydays are often held out as heroes, while hard working members of the financial services community frequently find themselves under fire for their compensation. But my opinions on the matter are unimportant because, like it or not, this proposal will soon become a FINRA regulation.
It became a done deal when all four of the major wirehouse firms gave their written approval to allow FINRA to require advisor recruiting deals be disclosed when they switch firms. Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo said they were in favor of the proposal, but did they really have a choice? I don't think that any firm wants to deal with this sticky issue, but an opposing vote would be politically incorrect.
Opposing the rule would be perceived as a move to block transparency. Some would see it as an effort to put advisors' and firms' interests ahead of those of their customers. Major firms with their fragile public images can ill afford such controversy, and so were compelled to agree.
Despite the fact that the big four appear to support the FINRA proposal, don't believe for a second that firms will use this rule as justification to reduce current record high recruiting packages. Most firms we talk to tell us their recruiting results this year are tepid even though deals are at a high watermark.
The fact remains that almost every broker-dealer firm wants to increase its advisor count, and yet the industry is not dedicated enough to organic growth to fulfill its growing needs. The only quick fix available is recruiting from the competition and that won't happen without substantial incentives.
The recruiting wars will continue, but after the rule is imposed, how should advisors handle this delicate matter with their clients? Actually, we have been urging advisors to disclose their transition deals for years. We know that when one changes firms, some former colleagues who have been reassigned accounts will tell clients that your former advisor has moved mainly for big money. We urge candidates to get ahead of this possible negative spin sooner rather than later.
It is okay to tell clients that you have moved to a better place and that because you are at the top of the profession, you were given financial incentives. You can properly explain a $1 million upfront deal in these less flamboyant terms:
"Mr. Customer, XYZ firm paid me $1 million to join. However, the actual income I receive will be spread over 10 years and, if I leave, I must repay the money. So it becomes, in effect, a $100,000 annual salary in addition to my normal compensation, giving me and my family a little stability in this volatile profession."
Such dialogue has so far proved successful. But what will disclosure look like in the new world order?
How will firms and recruited advisors reveal their so-called enhanced compensation deals? FINRA is asking that clients see a detailed disclosure including all aspects of these transactions.
Such details will lead to more misunderstanding than clarity. Recruitment deals are unique contracts that are complicated and difficult to comprehend. Advisors moving for the first time are often confused by the many aspects of these transactions. I have spent hours explaining standard transitional compensation deals to securities attorneys who are schooled in contract law, yet still confused by our industry's unique approach. Whereas disclosure may be a good idea, the devil is in the details.
Recognizing this dilemma, Patrick Cox, who responded to FINRA 13-02 on behalf of Ameriprise, suggests, "...general disclosure presented prominently and in plain English is more likely to generate questions from the client that would lead to a more meaningful conversation relating to the registered representative compensation received in connection with recruitment." He further offers that a detailed disclosure requested by FINRA, "...is more likely to run the risk of being ignored by the client, either because it appears to be confusing or intimidating for the client to digest."
Confusion and intimidation lead to distrust, which is precisely what the industry is attempting to avoid. Let's hope for a clear, honest disclosure format that clients will generally understand.
How Will They Take It?
How would your clients react if you shared the details of your recruiting deal? I have conducted an informal survey in the last few weeks and the most common answer to this question is that large clients will be okay with it, but some smaller clients may be upset.
Smaller clients are often resentful for a variety of reason, not the least of which is they are most often ignored. It is not surprising that those who usually get the least service might resent learning that their advisor is being rewarded with a signing bonus.
Obviously, the most critical consideration is how your top clients will react. A recent study conducted by a wirehouse concluded that, on average, 15 relationships drive 85% of an advisor's revenue. So the best question for an advisor to ask is, "How would my top 15 relationships react to these new requirements? Considered in those terms, disclosure may not be such a daunting task.
I believe the advisors I surveyed were confident that large clients would be understanding, because they, like you, are or have been successful. They understand that top performers in any profession are paid more. In fact, knowing you received a signing bonus might elevate you to all-star status.
Most firms and their managers seem unfazed by the pending change. The consensus is that we might see an initial slowdown, but all will adjust and carry on as usual. Some feel that marginal advisors with weaker relationships will be the most negatively affected, but the top teams and individuals will successfully navigate the challenges of disclosure. I tend to agree, provided that the mechanics of the process offer clients clarity and not confusion.
Whether you like it or not, disclosure is coming. It will probably be a rule by the beginning of 2014. Most think that it will not impact the size of deals. If properly formatted by FINRA and the firms, it should not necessarily have a negative impact on the relationships between most clients and their transferring advisors. However, if you are in the market to move, you may wish to contact your favorite recruiter and avoid these pending uncertainties by finding a new home this year.
Bill Willis is founder and president of Willis Consulting Inc.,
a financial services recruiting firm based in Palos Verdes Estates, Calif.