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What’s next for Broker Disclosure?

What’s next for Broker Disclosure?

FINRA is contemplating a rule that would require brokers to disclose any incentives they receive to jump to another firm. It’s likely to pass and that will change how recruitment deals are structured in the future.

Next week, the board of the Financial Industry Regulatory Authority (FINRA) plans to review a controversial proposal that, simply put, would require brokers to disclose the incentive they receive when switching firms (if the incentive totals more than $50,000).  While this topic has been bumped from FINRA’s agenda in the past, I believe that a ruling is imminent and will eventually pass. If it does, it could have far-reaching implications for all advisors who change firms in the next several years and beyond.

The financial services industry is divided on whether the disclosure is a good requirement. Wirehouses and their trade organization, SIMFA, have backed the ruling citing that it promotes increased transparency and investor confidence.  Some independent broker-dealers, on the other hand, see it as a violation of broker privacy and unreasonable to require clients to review information without proper context. Most advisors – particularly those who run businesses serving high net worth clients and institutions – are not worried about the possible mandate. They believe that transparency is a good thing for the industry and they would have no qualms about disclosing transition package details to their clients.

From my seat, as a recruiter, I am thinking about two things:

  1. Today’s high water mark transition deals could be impacted if this rule passes.  It’s anyone’s guess as to whether the next step in the discussion is to imply that advisors are simply paid too much to move their businesses.  Those advisors who are in exploration mode may well be advised to accelerate the process and, move sooner rather than later, if moving is the right choice.
  2. The fact that a transitioning advisor is being paid a sum of money as an incentive to change firms has no bearing upon the way he serves his clients. Almost without exception, the advisors with whom I’ve had the privilege to work have chosen to change firms or go independent because the move would allow them to serve their clients better, grow their business faster, and build a superior quality of professional life.

Regardless if FINRA implements the disclosure rule, it will likely have little or no impact on the way brokerage firms and advisors do business. There is an insatiable demand for talented, honest and successful financial advisors by the brokerage houses. Simple supply/demand economics dictate that firms will continue to pay a premium for these advisors whether or not there is mandated disclosure of the size, scope and details of these payments.

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