Bonus disclosure deserves second look

Jun 29, 2014 @ 12:01 am

The Financial Industry Regulatory Authority Inc. has pulled its proposed broker bonus disclosure rule for further consideration, and perhaps revision, in light of comments from industry participants.

That may be a prudent step, but Finra should not back off from implementing a disclosure rule eventually. Clients should be aware of all the factors that induce brokers to change firms before they decide whether or not to follow them, with all the disruption to their accounts that might involve.

In its announcement of the withdrawal, Finra spokesman George Smaragdis said the organization “continues to believe that customers would benefit from knowing that financial incentives may have motivated their representatives to change firms.”

Naturally, most of the comments on the new rule sent to Finra during the comment period were from brokers and broker-dealers, and most opposed the rule. Some respondents argued that if Finra is concerned that brokers might be tempted to churn accounts to justify the huge bonuses, procedures are already in place at the firms involved to monitor such activity, so the rule is unnecessary.

Others argued the administration of this disclosure would be burdensome to compliance departments and distract them from “the real issues at hand.”

Another commenter was concerned that brokers would “become the targets of blackmail, extortion (fraud) and more” when certain clients learned that their broker had received a large bonus.

“We are concerned that un-scrupulous clients and/or their attorneys may use a large bonus as a way to extort money from brokers. A client who is down 15% in his portfolio that is meeting his exact stated financial goals may take it upon himself to threaten a complaint unless his broker "shares' some of this bonus money with him,” the commenter wrote.

One commented that he knew of no other industry in which personal compensation is a public matter, other than professional sports. He obviously is forgetting about chief executives and chief financial officers of major corporations, the presidents of major universities, politicians and even teachers and police officers in some states and cities.

On the other side, one fee-only adviser said a family he worked with had a Bank of America Merrill Lynch adviser who had changed firms on average about every three years. “The transitions we have seen often involve certain minimum amounts of assets that have to transfer to the new firm ... for the incentive payouts to fully vest for the broker/investment adviser. I have a hard time understanding how this can be beneficial for the client, particularly when it happens repeatedly.”


One theme running through the broker comments was that having to disclose the bonuses would somehow taint the big-bonus brokers. Yet, in other fields, those with the biggest bonuses and paychecks are recognized as the superstars. The same would likely apply to brokers. After all, the reason they are recruited with big bonuses is that they are among the highest revenue producers.

That suggests they have many highly satisfied, high-net worth clients who likely will follow them to a new firm. Therefore, disclosure of the signing bonuses might enhance the reputation of those required to disclose them.

Indeed, clients who find out well after the fact that their broker switched firms because of a huge bonus — not because it was arguably better for clients — and the clients moved right along with him or her, might lose trust in that broker.

Now that the proposal has been withdrawn temporarily, Finra should seriously consider suggestions for changes to its proposed rule. One valuable idea suggested by a commenter is to allow brokers to explain in the disclosure document the other reasons for changing firms, such as better systems, etc. Indeed, money is not always the only incentive.

In any case, Finra should proceed with the rule. Greater transparency, accompanied by explanatory comments, will certainly be better for clients.


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