FINRA's Recruiting Disclosure Rule Passes to SEC

FINRA's Recruiting Disclosure Rule Passes to SEC

FINRA’s Board of Governors approved a proposal on Thursday that would require firms to disclose the financial incentives they pay to recruit a broker from another firm, claiming the information will help clients understand their brokers' motivations to make the move and therefore be better informed to decide whether they want to move with them.

The rule also requires firms disclose pay increases over the first year of employment of either 25% or $100,000, whichever is greater. The regulator said this would help identify sales abuses motivated by financial incentives, which may help the agency forge future rules. The rule now goes to the SEC. The commission will gather public comments before making any final decisions.

Some brokers fear the proposal will hamper their ability to change firms and incent recruiting firms to lower signing bonuses.

Stifel Financial’s CEO Ronald J. Kruszewski wrote in an earlier letter to FINRA that “by unfairly singling out financial advisors for intense scrutiny of their private financial circumstances, some may be hesitant to move to a new firm because of the unwarranted negative perceptions disclosure may create among his or her clients.”

But these fears are overblown, says Matt Lynch, a principle with Tiburon Strategic Advisors. “Ultimately, I think that advisors who do a great job for their clients will not be affected by this,” Lynch says. While recruitment may take a small, initial hit, the industry will still have a revolving door situation going on and some form of incentive pay will remain. 

"Most quality advisors we speak with seem pretty non-plussed by it," says Mindy Diamond, an industry recruiter. "Most have been in favor of greater transparency all along.  In the short term, FAs who are looking to make a move – or who have been on the fence, may accelerate their process."

"Advisors who might be most bothered by the rule are those who service lower-net-worth clients, as it may be harder to explain getting a big check if they move," she said.  It could also be harder for transitioning advisors to bring along institutional clients, since there are more decision makers in that arena who would need to get comfortable with the advisors' incentive, Diamond said.

The new rule—which still must be reviewed and approved by the SEC—imposes both a disclosure obligation on brokers, as well as a reporting duty for the firms on compensation increases.  Under the proposed requirements, advisors will report all signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, transition assistance and any future payments (trade-based or asset-based) contingent on performance criteria. The clients will see this payment information in ranges, for example, from $100,000 to $500,000, or $500,000 to $1 million.

Ultimately, the disclosure could look like just any other prospectus that clients receive, along with the up to hundreds of disclosures and information they receive when their advisor moves firms. This begs the question, will clients actually even look at this?

“People trust their advisor,” says Scott Smith of Cerulli, adding that unless the numbers were prominently displayed on the cover of an advisors brochure or marketing materials, most clients won't care. “Clients don’t trust the firm, don’t trust the industry, but they trust their advisor.”

TAGS: Industry
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