The SEC sent a warning to b/d executives Monday about the recruiting bonuses they pay to advisors, saying they could create conflicts of interest. In an open letter to b/d CEOs, SEC Chairman Mary Schapiro “reminded” them of their supervisory responsibilities. The friendly reminder comes in response to reports about firms offering “large up-front bonuses and enhanced commissions for sales of investment products,” Schapiro’s letter says. Because the big upfront bonuses require financial advisors to hit high production targets, they can create incentives among advisors to sell products that are not good for clients, it says.
“Certain forms of potential compensation may carry with them enhanced risks to customers,” Schapiro writes. “Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given. Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors. For example, if 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 unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest.”
The letter comes as b/ds, especially wirehouse firms, continue to offer huge recruiting bonuses to top producing reps at rival firms. The recruiting deals at the four wirehouses (UBS, Morgan Stanley Smith Barney, Merrill Lynch and Wells Fargo Advisors) range between 200 and 250 percent of trailing 12-month production. Check out our September story about the recruiting bonus frenzy among top firms and reps.
In the meantime, there’s no indication the deals will go away. “The horse is already out of the barn on this one,” says one recruiter in the west who preferred not to be named. “If she’s just saying ‘be careful’ without any real follow up, then she may just be covering her backside in case there are real problems with these deals in the future.”
“[Wells Fargo Advisors] doesn’t have and never has had mandates or financial incentives to encourage financial advisors to sell particular products. It is completely open architecture and the only mandate any FA has here is to always do what is right for their clients,” says a spokesperson for Wells Fargo. Other wirehouses could not immediately be reached for comment.
