FINRA likely to institute advisor signing bonus disclosure

Posted: April 16, 2013 in financial advisors, Financial Industry Regulatory Authority

With the market reaching new highs, wirehouses are engaged in a race to recruit financial advisors with the largest followings, dangling record signing bonuses in front of them to encourage defections. Currently, when brokers switch firms, clients know nothing about the reasons behind the change and the financial incentives involved unless the broker chooses to disclose information.

That’s about to change. The Financial Industry Regulatory Authority, the self-regulating organization for the industry, is seeking comments on a proposed rule change that would require brokers changing firms to disclose “enhanced compensation” worth more than $50,000 awarded as an incentive to move from one firm to another, according to The Wall Street Journal.

What this means is that when any broker who jumps ship to a new firm contacts a client he or she worked with at a previous firm, a disclosure about the amount of compensation involved in the move would have to be made in the first contact between that client and the broker. The intent of the rule is to more fully inform clients about material information surrounding a move to a new firm, so the client could make a more informed decision about whether to move his or her account with the departing advisor or stick with the current firm.

I think the rule is overdue. For financial advisors and their clients, the trust is an important currency in the relationship. The best advisors want their clients to believe in them and fully trust them, so revealing material information involved in a switch to a new firm seems like a no-brainer to me.

I would imagine that for many advisors switching firms, compensation isn’t the only driver. So disclosing compensation along with the other reasons for the switch to clients, placing all the information in context, isn’t too heavy a burden to place on advisors seeking to retain their clients. If it was me, I would want to know all the relevant information behind the switch and for me, significant compensation is part of relevant information. Being honest and forthcoming with clients in explaining the reasons for a move to another firm, in my opinion, can only benefit the advisor-client relationship.

Critics of the proposal note that other financial professionals, such as investment bankers, aren’t required to disclose this information. Financial advisors, of all of the financial professionals, occupy — or should occupy — a unique position of trust in their client’s lives. Turning your money over to a financial advisor places that advisor in a unique position in a client’s life and confers on that advisor a responsibility to act in an honest and trustworthy fashion. Let’s get these rules in place as soon as possible.

  1. This is a difficult topic for advisors at the moment; there is certainly a need for greater transparency, but I think the proposed rule lacks clarity and fails to effectively address the issue. The proposed rule is very broadly written in some sections and under-inclusive in others, resulting in a proposal that is not well-designed to provide protection for investors beyond current regulations. It also fails to address retention bonuses and similar compensation which may raise similar conflict of interest concerns. Additionally, there is also the concern that the disclosure requirements may prove counterproductive for other important goals like succession planning for financial advisors. Interesting (and topical) read!

  2. Great article, Amy. You have done some of your best writing lately and I wish I could share the articles right from your emails! Financial advisors need more transparency but also to act strictly in a fiduciary role.

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