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Examining the FINRA Broker Disclosure Document

Examining the FINRA Broker Disclosure Document

Over the last few months the FINRA recruitment/broker disclosure discussion, and documents, have come into closer focus. It seems to me that the larger member firms are a bit too close to the process.

Over the last 45 days or so the FINRA recruitment/broker disclosure discussion and documents have come into a little closer focus. FINRA released its final version to the SEC after taking comments from member firms and affiliates over an allotted time period as well. After taking a good look at both the document itself as well as the comments and recommendations of member firms I have come to a couple of conclusions.

The top half of the document strikes me as unnecessary, arbitrary and borderline invasion of privacy. Requiring advisors to disclose the type of remuneration they may have earned in a negotiation to move their business from one firm to another (in a way “selling” their book; not so differently than an entrepreneur, doctor or lawyer may do at any given time) is a terrible idea. I disagree with the premise that this adds some sort of new disclosure or transparency into the process and somehow benefits clients. It is pure and simple an invasion of privacy. Advisors have worked extremely hard to foster trusting relationships with clients and their assets – and to disallow a certain amount of privacy to be inherent in a transaction that should ultimately benefit the client is outrageous. (If I were a little bit more cynical, I would simply make the assumption that the larger member firms {read wirehouses, global IB’s and regionals} pushed for the $$ disclosure to discourage the transfer of assets from their firm to another). The entire top section of the document just seems rife with a mixture of populism gone bad and member firms of a certain size benefitting from a disclosure that adds nothing to the conflict of interest conversation. It’s frivolous.

On the other hand, the bottom half of the document is information that seems right minded and pointed in the right direction. This section focuses on the possible costs of account transfers, the portability of assets and the possible tax ramifications of any sales that may occur based on said lack of portability. By keeping the focus on the possible monetary consequences that may be forced on the clients, as opposed to the frivolous nature of the purchase of a business – FINRA is on the right track. While many previously hidden fees and costs have been brought to light over the past 6 years (since the financial crisis) this particular issue of portability shines another light that need be shined. It exposes that profits and possible conflict of interest in proprietary products. If an advisors practice is loaded with proprietary products and decides to make a transition, this portion of the document will expose their commitment to possible enhanced payouts as opposed to client suitability. (To be fair – not all proprietary products are a net negative to clients and their portfolios. In general, though, the client will incur cost and possible tax ramifications if those products need to be liquidated in any transfer.) As an instrument for renewed disclosure and transparency in regards to costs, fees and taxes the bottom portion of the FINRA disclosure form makes sense.

In summary, it seems to me that the larger member firms are a bit too close to the process when it comes to this FINRA document. The top portion with its numbers, cash equivalents, deferred comp language etc seems like a convenient way for the wires to further slow down out of control recruiting deals. Yet is comes at the expense of advisors’ ability to build a successful business and appropriately monetize it at some point in their career.  If left to just the costs, fees and tax ramification disclosures this document might be just what was needed for client transparency. One thing we do know is that the laws of cause and effect still remain – and the larger member firms will react in due time and find a way to adjust and keep the recruitment game tilted in their favor.

Andrew Parish is the founder and CEO of AdvisorHUB.

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