Skip navigation

SEC Says Careful With Your Recruiting Bonus

The SEC sent a warning to b/d executives Monday about the recruiting bonuses they pay to advisors, saying they could encourage advisors to do things that are not in their clients’ best interests.

The SEC sent a warning to b/d executives Monday about the recruiting bonuses they pay to advisors, saying they could encourage advisors to do things that are not in their clients’ best interests. In a short open letter to b/d CEOs, SEC Chairman Mary Schapiro “reminded” executives of their supervisory responsibilities. She said her friendly reminder comes in response to press reports about firms offering “large up-front bonuses and enhanced commissions for sales of investment products.”

Recruiters disagreed about what kind of impact the warning might have—one recruiter said firms might change the way they structure their recruiting deals, but others said that firms would probably just review their deals and put more compliance controls in place.

The letter comes as b/ds, especially wirehouse firms, continue to offer huge recruiting bonuses to top producing reps at rival firms. The recruiting deals at the four wirehouses (UBS, Morgan Stanley Smith Barney, Merrill Lynch and Wells Fargo Advisors) range between 200 and 250 percent of trailing 12-month production, and often include components that reward advisors for bringing over certain percentages of assets, and meeting pre-established production targets. For example, an advisor might be awarded 20 percent of the total deal when he begins generating 100 percent of his trailing 12 months production. (Check out our September story about the recruiting bonus frenzy among top firms and reps.)

These production based bonuses and incentives can encourage advisors to churn accounts or sell products that are not good for clients, Schapiro’s letter says. “For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest,” the letter says.

In response to the letter, some firms might get rid of the production-based bonuses, says Danny Sarch, founder of Leitner Sarch Consultants, a financial services executive recruiting firm. Sarch says that wirehouse firms stopped using these kinds of bonuses a few years ago when the SEC sent out a similar warning, but that this year, they came roaring back. “The performance deals for a long time were based on assets, not on production,” says Sarch. “However, that changed during the crazy times that we’ve seen in the last year. Firms went back to commission-based and asset-based back-ends. When you put incentives on commissions it is possible that somebody’s interests would be hurt.”

Not everyone agrees. “What I got from the letter was more, 'hey, you better have the compliance regulations and rules intact, making sure that they’re not doing anything that they are not supposed to be,'” says Jodi Papike, vice president of Cross-Search in Jamul, Calif., an independent recruiting firm. And Morgan Stanley spokesman James Wiggins says revenue-based bonuses, as well as asset-based bonuses, have long been common practice in the industry. (He declined to comment further on Schapiro’s letter.)

Meanwhile, a Wells Fargo Advisors spokesperson says the firm “doesn’t have and never has had mandates or financial incentives to encourage financial advisors to sell particular products. It is completely open architecture and the only mandate any FA has here is to always do what is right for their clients.”

At the very least, firms will probably review their recruiting packages, says Andy Tasnady, a compensation consultant in Port Washington, N.Y. “People at the top will check to make sure they know all the recruiting packages that are being offered. If they’re over-rewarding something on the back end, they will probably look at it.”

But the recruiting deals themselves are unlikely to go away. “The horse is already out of the barn on this one,” says one recruiter in the west who preferred not to be named. “If she’s just saying ‘be careful’ without any real follow up, then she may just be covering her backside in case there are real problems with these deals in the future.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.