FINRA Mulls Compensation Disclosure Rule, Again.

FINRA Mulls Compensation Disclosure Rule, Again.

The regulatory organization will consider whether advisors should be required to disclose recruitment compensation packages to clients when they change firms.

FINRA is once again putting the topic of broker recruitment packages on the table.  According to a notice the regulatory organization posted to its site yesterday, next month’s Board meeting will include consideration of a rule change that would require brokers to disclose details of their recruitment compensation packages to their clients if they were to move from one firm to another.

A few questions:

  • Will FINRA actually make this change, originally proposed by Arthur Levitt during his chairmanship of the SEC from 1993 to 2001? If so, how will advisors and the firms that offer transition packages respond?
  • Will simply raising the issue again – regardless of outcome – be enough to impact advisor movement in the near term?
  • Will the proposal be a further boon to the independent space?

FINRA has long threatened that transitioning advisors may be forced to disclose the details surrounding their recruitment packages. This would, in turn, compel the firms offering them to significantly change the structure of those packages, mostly to guard against churning by advisors wanting to achieve back end bonuses attached to their deals.  It’s anybody’s guess at this point as to what FINRA  will ultimately decide; I think it’s fair to say that at some point the wealth management community’s greatest fear will become a reality.

 We have long warned advisors that recruitment packages being offered today, especially by the wirehouses, are at a high water mark and structured in as “user friendly” a manner as they could ever be.  We’ve said specifically, “If you’re waiting for more of your unvested deferred compensation to vest and your retention money to forgive, be aware that the structure and size of future deals could look very different down the road due to the changing regulatory environment.”

Today, firms looking to recruit top advisors have been able to raise the total packages to an eye-popping sum of 300%+ by structuring the deals whereby only half that amount , at max, would be offered upfront, and the remainder earned by the advisor upon hitting asset and production hurdles over the next 3-5 years.  The advantage of backend earn outs is that they allow advisors to participate in their own growth.  This proposed FINRA rule change would likely force firms to restructure these deals.  While we are not certain what they would look like, we do know, that firms will never offer more than 150-160% of an advisors trailing 12 months production upfront, as it would put too much of the firm’s capital at risk.  So, the biggest question raised is: Will the overall size of the deals come down in order to respond to the mandate?

Independent firms like Dynasty Financial Partners, Focus Financial Partners, and RIA custodians are likely excited by the proposed rule change.  If the biggest hook the traditional firms have to entice top advisors is their transition packages, an unfavorable change to those packages may further diminish their recruiting efforts.  We have already watched a percentage of the industry’s top advisors turn down enormous transition packages and choose to go independent.  I believe that FINRA’s proposed rule change could push more in that direction.

It’s anyone’s guess whether the new head of the SEC and FINRA will actually force changes to significantly impact size, structure, and disclosure requirements attached to recruitment packages.  From my perspective, yes or no, the very suggestion of the changes will have an impact on advisors who have long held the belief that a move would be in their future, but that they had all the time in the world in which to make the change. 

Advisors are squeamish enough about suggesting a change of firms to their clients, even when they are certain the move is in those clients’ best interests.  Imagine raising the issue and having to also say, “Oh by the way, I’m being paid $5 million to do it.”  This recruiter believes that every advisor would shudder at such a notion.  While we wait and see what FINRA will actually do, with new questions raised, advisors should have their eyes and ears open and take this time to get educated about their options elsewhere – and decide whether to move now or roll the dice later.

Mindy Diamond is president of Diamond Consultants, of Chester, N.J., which specializes in retail brokerage and banking recruiting.

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