FINRA took steps to protect clients wanting to stay with advisors switching firms under a new rule that provides key questions the self-regulatory organization says should be asked.
Under the new rule, approved by the SEC last week, when member firms hire representatives from other firms, they must provide a paper or electronic "educational communication" written by FINRA to former clients if they try to persuade those clients to move their assets.
In the original proposal filed in December, FINRA said that the communication must be provided to those clients when they are first contacted about transferring assets.
“The former customer’s confidence in and prior experience with the representative may be one of the customer’s most important considerations in determining whether to transfer assets to the recruiting firm,” FINRA says in the filing.
But FINRA expressed concern that the former clients might not be aware of other important factors in making a decision about whether to transfer assets, including costs that they could incur, the differences in products or services between the firms, and whether the reps receive financial incentives that could create a conflict of interest. The educational communication provides clients questions to ask of the advisors.
Although FINRA in its proposal acknowledged that member firms could incur some costs associated with providing the educational communication to former customers, it emphasized that the requirement would “protect investors by highlighting the potential implications of transferring assets to the recruiting firm.”
“More education -- it’s hard to say that’s a bad thing,” industry recruiter Danny Larch, president of Leitner Sarch Consultants in White Plains, N.Y., says about the rule's passage.
However, he adds that “regulators may be looking in the wrong places,” as advisors who change firms have been fully vetted by their new employers and are likely to be transparent and honest.
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