Presumably, sometime during 2014, FINRA will implement Regulation 13-02. This rule will require financial advisors who change broker-dealers to disclose the compensation they received from their new firm as part of the recruitment deal.
The details are sketchy on how it will be implemented, but this regulation is causing a great deal of consternation within the financial advisory industry. The rule has many public supportersincluding the major wirehouses and regional broker-dealersand detractors, which include many recruiters.
Many of my competitors are opposed to this requirement for several reasons. First, they fear that clients will be so outraged at discovering that their advisor received a large sum of money as an inducement to transfer firms that they will not follow that advisor to the new firm. Second, advisors will be so embarrassed by their new-found riches that they will not move for fear of angering their clients. Third, some recruiters believe that brokerage firms will be so afraid of clients discovering that they pay up-front money to induce advisors to move that they will stop offering it.
With advisors so afraid to take the money, and firms afraid to give the money, movement will stop and Headhunter Armageddon will be the result. I respectfully disagree about the likelihood of this scenario.
Movement Won't Stop
To understand why, take a look at the motives of the proponents of Regulation 13-02. Are they somehow pure and only looking out for the public's interest? Doubtful, in my opinion.
The big brokerage firms are in favor of the rule because they have to pick their battles against industry regulators. Any argument against transparency is a tough argument for them to make. Although they hate regulator interference in their business, brokerage firms also hope that disclosure will lead to smaller deals. Small brokerage firms and RIAs are for the rule because there is a chance that up-front money will go away or shrink. This will make them better able to compete with the big firms.
The bottom line is that FINRA, the SEC and the public have every reason to mistrust Wall Street. Every major firm has had its share of scandal over the years. FINRA's formally stated reason for pursuing 13-02 is concern over conflict of interestwhich has been rife over the yearsin that an advisor's decision to move when so much cash is on offer might not be in the best interest of his or her client.
I believe this concern is misguided. As far as I can tell, advisor movement in the industry during my 29 years as a headhunter has not inspired an epidemic of lawsuits accusing greedy advisors of benefitting from a move at the expense of their clients.
It makes sense to me that if there has been a problem where unscrupulous, greedy advisors have been moving, and subsequently their client have been injured due to a conflict of interest, then justice-seeking attorneys would already be all over this. Or clients, having determined that their interests were not protected, would vote with their feet and refuse to move with those advisors.
Although I do not believe in Headhunter Armageddon, I am against 13-02 for two reasons. First, I believe that an advisor's compensation should remain private; second, I do not think regulators will be able to explain the nuances of a deal without sensationalizing the numbers.
Regardless, I believe that 13-02 in some shape or form is inevitable. In fact, my firm has been urging advisors to disclose their deals proactively for many years. Former colleagues left behind at an advisor's old firm will sometimes use the "deal" as a way to sell against their departed "friend." Whether it's the industry driven, misguided Reg 13-02, or just a preemptive strike, you should be prepared to talk with your clients about the money you received.
Having the Talk
How do you have this awkward conversation? There is no single answer for any one advisor since advisors have many clients. The following are some suggestions that might work; use them where appropriate based upon your personality and the personalities of your clients.
The Blunt Approach: I met an advisor socially who was a serial mover. He's moved almost purely for up-front money three times in his career. His explanation to his clients is consistent and clear: "I got offered a lot of money to buy my business, yet I keep my business. What would you do if you were in my position?"
The "Free Agent" Approach: This advisor told me that her approach was to explain to her clients that she was flattered by the attention that other firms paid to her during the wooing process. "My practice has value only because my clients are loyal and value the services that I provide," she tells them. "The fact that other firms want to pay me significant dollars for my practice relative to others that are out there is gratifying and rewarding. Do you want to put your trust with an advisor whom other firms ignore or put your trust in an advisor whom others are clamoring for?"
The "Explainer" Approach: Another tack that you could take is to get into the true economics of how an advisor gets paid and how the deal is spread out over many years. That conversation could go something like this:
"Mr. Client, my old firm has essentially held part of my pay hostage for many years, adding to the total as I grow. This deferred income is lost when I transfer companies. In addition, because my business takes time to move from one firm to another, I will go a few months without any compensation. The money I receive is to make up for deferred compensation, and to bridge the gap as I wait for clients to transfer. Also, as you are already aware, my former colleagues are calling my clients, attempting to incent them to stay. The money I received is also to pay for that risk. Finally, understand that the money is in the form of a loan and is only repaid with many years of service. Over nine years, the money comes out to just (fill in the blanks...$x per year)."
Clients Will Understand
In every case, we urge advisors to consider moves based on the needs of their clients first. You need to be able to articulate why your new firm is better for them as well as for you. If you are doing a good job, your clients care about your happiness. Inevitably, many clients, especially in a post-financial crisis world, wonder why an advisor took so long to leave his or her tainted old company.
Although I do not believe that Headhunter Armageddon is upon us, I do acknowledge that some deal conversations with clients will be uncomfortable. From talking to dozens of advisors about Reg 13-02, the one consistent trend that I see is that the higher the net worth of an advisor's clientele, the less concerned he or she is about disclosing the specifics of his or her up-front deal.
That said, until the wealth management industry finds a way to successfully train the next generation, the short supply of quality, high-producing advisors will keep firms of all sizes and models competing and paying for top talent. It is you, the talented advisor who is likely to be offered some form of deal to change firms, who needs to be able to look your clients in the eye and explain why such a move would make sense for them as well as for you.
Danny Sarch is president of Leitner Sarch Consultants (leitnersarch.com),
a boutique search firm specializing in the wealth management industry.