Finra puts onus on clients to find broker recruitment incentives

New proposal would make discovering bonuses for moving a do-it-yourself proposition for investors

Sep 19, 2014 @ 2:22 pm

By Mark Schoeff Jr.

A revised Finra proposal on broker compensation when switching firms puts the responsibility on clients to determine what kind of recruiting incentives their financial advisers received.

The board of the Financial Industry Regulatory Authority Inc., the industry-funded broker regulator, on Friday authorized for public comment a proposal that would “require a recruiting firm to provide a Finra-created educational communication” to clients of the broker who are weighing whether to transfer their assets with him or her, according to a document that Finra chairman and chief executive Rick Ketchum posted on Finra's website.

The “educational communication” would suggest questions clients should ask their brokers “to make an informed decision” before following them to a new firm, according to the document.

Those queries would relate to costs the customer could incur, investments that may not transfer and financial incentives the broker is receiving that could encourage him or her to persuade clients to make the move.

The revised broker compensation proposal makes uncovering recruiting incentives a do-it-yourself proposition for investors. That's a significant change from the original proposal, which would require brokers' new firms to outline compensation packages in excess of $100,000 to clients from their previous firms.

Another issue, according to Brent Burns, owner of an eponymous law firm, is that the suggested client questions mentioned in the Finra document appear only to focus on incentives offered by the recruiting firm and not those offered by the jilted firm to any remaining brokers tasked with trying to keep clients of the departing broker.

“It's still unbalanced,” Mr. Burns said. “You're only disclosing one side of the coin.”

And what about the incentives brokers are given to stay in place at their current firms, said Ron Edde, chief executive of Millennium Career Advisors, a financial-adviser recruiting firm.

“If you're going to require disclosure of recruiting bonuses, then disclosure of retention bonuses also has to be involved,” he said.

Despite that issue, the foreshadowing of a new proposal drew praise from Mr. Edde, a critic of the original.

“It's less invasive and it's more evenhanded,” he said.

In June, Finra withdrew the original proposal from the Securities and Exchange Commission, where it was awaiting SEC action. Finra received 184 comment letters on the original proposal. Critics citied worries about implementation and a lack of clarity about what information had to be disclosed.

It was not clear whether the SEC would have approved the original proposal, Mr. Edde said.

“There were enough voices saying they were not happy with it as originally proposed to force Finra to restructure this proposal,” he said.

Finra did not indicate when it would release a regulatory notice and more detail about the revised rule.

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