Wirehouse support of FINRA’s proposed rule requiring brokers to disclose recruiting incentives caught many by surprise. Many industry observers characterized it as an effort to curb the ever-growing piles of money the firms must pay to recruit top talent; others suggested brokers would be less likely to jump from the mother firm if they knew they had to disclose incentives.
But the real motive here may just be pure politics.
Days before the comment period was set to close, several wirehouses including Morgan Stanley and Wells Fargo said they stand behind the move.
“A uniform disclosure regime will allow a client to weigh their advisor’s interests in switching to a new firm and consider how moving the client’s accounts may affect their own interests,” Morgan Stanley’s wealth management division wrote in support of the rule.
Their brokers, of course, are less thrilled and wondering why the firms are putting their support behind the proposal.
Mindy Diamond, president of the recruiting firm of Diamond Consultants, says that firms really had no choice. “I don’t believe that the move has anything to do with a clandestine effort to drive transition deals lower. They didn’t have a choice from a PR standpoint.”
If the firms had refused to support FINRA’s stance, it would’ve sent a message to the public that they didn’t support putting the client’s best interests first. Additionally, wirehouses may have had to grapple again with a public discussion about their perceived lack of transparency.
Diamond also dismissed fears that the wirehouses planned to use the rule as a way to come together to lower the current outsized packages. “These firms know that without sizable deals, they will do no recruiting,” she says.
For example, when wirehouses lowered their deals in early 2010, recruiting dropped as well. Less than 6 months later, wirehouses caved, introducing gradual increases that have risen over the years to become today’s high water mark numbers.
“Recruiting is driven by deals- and given the amount of unvested deferred compensation and money owed by many advisors to their firms, without these deals, no one of quality would make a move,” she says.
But the wirehouses did provide several suggestions and clarifications on the proposed rule, including language requiring brokers to provide clients with written, rather than verbal, disclosure of their compensation.
“Due to the difficulty in documenting proper oral disclosures … the final rule should require recruiting firms to provide clear and prominent written disclosures,” Wells Fargo wrote.
Although there’s some many specifics to be ironed out, with the wirehouses on board it’s a good bet that the rule will be passed, Diamond says. This means that for advisors looking to move, but don’t relish having to disclose to clients the amount of transition money they receive—it might be time to consider accelerating the timeframe. Diamond predicts that advisors have six months to a year before the rule hits the market, giving brokers who don’t want the hassle to plan for a new landing spot.
“For today, it is very much a seller’s market and advisors are in the driver’s seat,” Diamond says. Will that change with an implementation of FINRA’s proposed rule? Probably not, says Diamond. Recruiting may be suppressed for a bit, but as people adapt to the changes, it will pick up again.
“I think it will become part of the “new normal” and advisors and firms will adapt to it just as they have to all other changes in the industry,” she says.