FINRA last week released Regulatory Notice 13-02 that proposes to require disclosure of financial incentives (“bonuses”) paid to financial advisors to change firms. In the Executive Summary to the Notice, FINRA indicates that the purpose of the rule change is “to address conflicts of interest relating to recruitment compensation practices.” As you know, currently financial advisors are not required to disclose the financial incentives they receive when switching from one brokerage to another.
The proposal begs the questions: Is a recruiting bonus really a bonus? And what exactly are the conflicts of interest?
“(I)f 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 unsuitableproducts or otherwise engage in activity that generates commission revenue but is not in the investors’ interest.”
What FINRA appears to be trying to control is the unscrupulous advisor who churns accounts to meet revenue hurdles in order to be paid additional back-end bonus amounts. While there is a back-end portion to many of the recruiting bonuses that are paid today, most are based upon the increase in assets under management and not increases in revenues. Why should an advisor come under scrutiny for trying to build his business and gather assets? Back-end bonus payments based upon the growth of an advisor’s assets under management would clearly not lend itself to the “conflicts” argument.
At the end of the day, regardless if FINRA puts into effect its proposed disclosure rule, it really will 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. Quality advisors will continue to put their clients’ interests first, choosing to change firms because it would mean being able to offer better service and better outcomes for those clients. Generally speaking, 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.
If new rules are to be promulgated, they should be well thought out, rational and based upon real conflicts of interest—not those that are merely speculative and illusory.
Howard Diamond is managing director & general counsel of Diamond Consultants, a recruiting firm.