I read the article “Finra backs incentive comp disclosure rule” (InvestmentNews.com, Sept. 19).
The transparency claim is a ruse. No one discloses their payouts now.
This money isn't paid by the client but by the firm — not by a product sponsor but accreted to the branch bringing in the representative.
The only conflict here exists between the Financial Industry Regulatory Authority Inc. and the Wall Street firms. Isn't it interesting that the wirehouses are the only group not objecting to this disclosure?
It appears the real intent isn't disclosure but to frustrate the departures of productive reps and accounts. As more reps leave, the pressure is mounting to do something, but this isn't it.
To date, it hasn't been required that reps disclose their payouts. Payouts by themselves are part of the incentive system that the entire industry works under.
Branch, department and manager overrides are all tied to payouts. Is this the beginning of disclosing where all of the compensation is paid?
Where and when does it end? Is it necessary to disclose which registered staff participates in commissions and which ones are strictly on salary?
“Forgivable” loans aren't forgiven. The “loaned” amount is earned back by the firm through the productivity of the rep transferring assets to the firm.
Like most loans, they are two-sided, providing needed cash -immediately, but come with consequences. When a rep disregards this agreement, both parties are drawn into arbitration.
Finra provides the forum for disputes about these loans. The volume and size of these disputes have increased in recent years.
Finra may view these “forgivable loans” as signing bonuses. They aren't bonuses but prepaid revenue designed to cover the cost of changing firms and provide an incentive to go through the hassles.
Industry professionals know that changing firms entails significant costs and loss of revenue. The forgivable loan is the cash flow required by these productive reps to make the change.
Revenue is lost, costs are in-curred, momentum is lost.
Even some clients are lost as a function of the broker-dealer change.
Reps don't make this change for the “bonus” money. They make the change for the perceived greener pastures that this “new” situation provides, such as supervision, compliance, marketing support, operations or reporting support, access to different products and services, etc.
Surveys indicate that the single largest reason that reps change is the relationship with their branch manager. The significance of this relationship can't be minimized.
This is the first point of compliance, communication and marketing support. It is vital to the growth of the rep, the firm, the branch — but most importantly, the client.
Reps make changes when a branch manager doesn't maintain superior relationships.
If the wirehouses want to protect their revenue and assets, their focus should be on the growth and development of branch managers. This will do more to blunt the transfer of client assets and productive reps than the disclosure of rep “forgivable loans” and payouts.
Finra should withdraw its support of this “disclosure” and reduce the appearance of being in the pocket of Wall Street.
FA Risk Management Inc.