Follow the Money: Revealing Broker Incentives to Switch Firms
NEW YORK ( MainStreet Your advisor suddenly announces he's switching firms and would love to transfer your accounts to his new home. Everything will stay the same, only better. Chances are, you've received that phone call at some point in time. The financial advisory business is an upwardly mobile career, as advisors hop from one firm to another seeking greener pastures. Green as in money.
Financial consultants receive big-dollar incentives to move their books of business, and the Financial Industry Regulatory Authority (FINRA) wants investors to know just how much money motivates these moves. FINRA has submitted a proposal to the Securities and Exchange Commission (SEC) that would require brokers to disclose recruitment compensation paid to them as an incentive to move to a new firm. If approved, brokers would need to disclose the bonuses for a full year following the move to any client that chooses to transfer with them.
"This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the costs associated with transferring his or her account," says Richard Ketchum, FINRA's Chairman and CEO. "This proposal reflects our commitment to transparency and investor protection."
Financial advisors would have to reveal any gain of $100,000 or more, including signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, and transition assistance -- as well as future payments (trade-based or asset-based) contingent on performance criteria.
In addition, firms would be required to report to FINRA any big bumps in pay to the advisor for the first year after recruitment. The trigger for notification would be an expected increase of 25% or $100,000 over the prior year's compensation, whichever is greater. This information will be used in risk-based examination targeting to look for sales abuses that may be motivated by the increased compensation and to inform any future rulemaking related to compensation incentives.
Firms also would be required to disclose any costs a client would incur for the transfer of assets as well as the fact that certain assets may not be transferrable.
In comments filed earlier this year with FINRA during the consideration of the proposed rule, William A. Jacobson, clinical professor of law and Director of the Securities Law Clinic at Cornell University, offered a favorable opinion.
"Enhanced compensation packages tied to recruitment can be as high as $15 million for some representative teams and include financial perks beyond the costs associated with transferring a representative's business from one firm to another," Jacobson wrote. "When one considers the vast similarities in services and products offered by the major wirehouses, it seems apparent that enhanced compensation is the primary factor in the decision to switch firms, not the client's best interest."