Bonus disclosure exposes divide

IBDs and wirehouses split on potential regulation to reveal recruiting packages

Apr 21, 2013 @ 12:01 am

By Mark Schoeff Jr.

A proposal from the Financial Industry Regulatory Authority Inc. to require brokers to disclose recruiting bonuses and other compensation incentives has split wirehouses and independent broker-dealers.

The divide between big brokerages that support the regulation and independents that oppose it is illustrated in the comment letters each side filed in early March.

Expounding on the wirehouse theme, Morgan Stanley argued that the proposal would help protect clients.

“A uniformly applied standard that requires detailed and "clear and prominent' disclosure of the specific dollar amounts, timing and nature of the financial incentives the adviser has received or may receive in the future will promote investor confidence and a clearer dialogue about the reasons to change firms,” Anne Cooney, managing director and general counsel at Morgan Stanley Wealth Management, wrote in a March 4 comment letter.


On the flip side, Cetera Financial Group's opposition is representative of the independent-broker-dealer argument. The disclosure, as outlined in the proposed rule, would be too complex, difficult to implement and violate brokers' privacy by putting their personal finances out in the open, according to the firm.

“It is not well-designed to provide protections to retail customers beyond what is afforded under current securities laws and regulations,” Nina Schloesser McKenna, Cetera's general counsel, wrote in a March 5 comment letter. “It also places an undue burden on retail customers to not only evaluate raw data and numbers without context as to what recruitment compensation is common in the industry or what might be out of the ordinary, but also to determine the relationship, if any, between the recruitment compensation and recommended products or strategies.”

The Finra proposal would require brokers to reveal any “enhanced compensation” they received — signing bonuses, upfront or back-end bonuses, loans, accelerated payouts and transition assistance — to anyone solicited as a client for one year following their transfer to a new firm. The rule wouldn't apply to incentives totaling less than $50,000.

Peter Chepucavage, general counsel at Plexus Consulting Group LLC, is not surprised that the wirehouses and independents are at loggerheads.

Wirehouses “spend a lot of money training their people and they have never liked being raided,” Mr. Chepucavage said. The recruiting bonus disclosure rule may crimp the broker pipeline, which can be costly as firms strive to outdo one another's incentives.

Independents, on the other hand, are trying to attract new brokers, and wirehouses have been prime targets.

“They want to raid,” Mr. Chepucavage said. “They want to draw these trained people. Not only are they trained, they have a book [of business].”

The wirehouses are trying to end the recruiting bonuses altogether, according to Ron Edde, president and director of financial adviser recruiting at Millennium Career Advisors.

“This is the first step toward the eradication of these large wirehouse transition bonuses,” Mr. Edde said. “The wirehouses were probably [the rule's] genesis.”


John Nowicki, president of LCM Capital Management Inc., said the bonus rule would give wirehouses an opportunity to act in concert to stop the bidding war.

“That's why they all need to do this together,” Mr. Nowicki said. “The firms that stop it [first] are not going to [recruit] anybody. That's a guarantee.”

Mr. Edde said he is mystified by the independents' opposition to the rule, which could end up benefiting them because they no longer would have to match or beat the bonuses offered by wirehouses to recruit top talent.

Wirehouses and independents contacted by InvestmentNews declined to comment beyond the letters they submitted to Finra.

The Financial Services Institute Inc., the trade association for independent broker-dealers, called the rule misguided.

“We think Finra has identified a legitimate concern, but we believe their execution of the rule making is poor,” said David Bellaire, the FSI's executive vice president and general counsel. Finra's proposal institutes a “bright-line test” on recruiting compensation “rather than a laserlike approach that focuses on real conflicts of interest.”

For instance, transition assistance, which covers a range of moving and other expenses when a broker changes firms, should not fall under the rule, according to Mr. Bellaire.

“We don't think that type of recruitment compensation raises a conflict of interest,” Mr. Bellaire said. “Instead, it facilitates a transfer and facilitates the ongoing relationship between a broker and client.”

Mr. Bellaire denies that there is a split on the issue between independent broker-dealers and wirehouses, citing the similarities between the FSI stance and that of the Securities Industry and Financial Markets Association.

“FSI, just like SIFMA, supports the disclosure of real conflicts of interest to investors,” Mr. Bellaire said. “When recruiting creates a conflict of interest, investors should be informed so that they can make proper decisions.”


SIFMA, a trade association for Wall Street firms, came out in favor of the recruiting compensation rule March 5.

“SIFMA reiterates its support for concise, direct and plain-English disclosures of information that is sufficient to inform an investor of the potential material conflicts of interest that may arise in connection with recruiting related bonus payments,” Ira Hammerman, SIFMA's senior managing director and general counsel, wrote in a comment letter.


It's unclear when Finra will submit a final rule for approval by the Securities and Exchange Commission. Before it does so, many observers are hoping for modifications.

“We think Finra went too far with the specifics of disclosure,” said Daniel Bernstein, director of re-search and development at MarketCounsel.

He also criticized the rule for ignoring the yin to the recruiting compensation yang — retention bonuses.

“It seems to make sense that disclosure would be required when [brokers] are paid to retain clients at their current firm,” Mr. Bernstein said.

Mr. Edde would like to see the rule scrapped altogether.

“Show me a single shred of evidence that one investor was harmed because an adviser moved for a large amount of money,” he said.


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