Broker recruitment bonuses on DOL's radar

Agency concerned about brokers who sell out client positions at old firm and generate commissions at new firm when they recreate investment portfolios

May 12, 2016 @ 1:35 pm

By Bruce Kelly

Buried in the sprawling, 1,000-plus-page Department of Labor fiduciary rule released last month are two references to “recruitment compensation,” the lucrative bonuses brokers receive when leaving one firm to join another.

The references have securities industry attorneys, typically a nervous bunch on their best days, all aflutter. They get anxious when new rules take effect and they don't immediately have clarity about their meaning. The published rule doesn't give much detail and simply lists “recruitment compensation paid in connection with transfers of accounts to a registered representative's new broker-dealer firm,” in a list of 10 other potential types of payment under the rule's explanation of ''fee or other compensation, direct or indirect.''

This additional compensation can add up, and whether brokers are disclosing the amounts of recruitment packages appropriately to their clients has been an issue over the last several years for securities regulators.

Currently, independent broker-dealers will pay an adviser with a strong book of business that generates fees rather than commissions 20% to 40% of the adviser's “trailing twelve,” or preceding year's total revenue. Wirehouse advisers, who typically annually produce two to three times more in fees and commissions than those working for independent brokers, get even bigger recruitment bonuses, which are paid out in chunks over several years. All in, those bonuses could be as high as three times a broker's trailing twelve, paid out over nine years.

Timothy Hauser, a DOL deputy assistant secretary, provided a bit of clarity about “recruitment compensation” and the fiduciary rule on Wednesday afternoon at a DOL fiduciary seminar sponsored by the Securities Industry and Financial Markets Association. The meeting was in New York, while Mr. Hauser appeared via video conference from Washington.

It sounds like the DOL is trying to prevent brokers from selling out positions of old products for new positions after they move to their new firms and generate fresh commissions, an industry practice that has become increasingly frowned upon over the past 10 to 20 years. In the eyes of the DOL, such recruitment compensation would be a reward for an increase in transactions, generating fees and commissions for advisers' new broker-dealers.

“Take the circumstance that comes to mind in connection with recruitment bonuses,” Mr. Hauser said. “You can tell me if this never happens, in which case you don't have a problem.”

“There is a circumstance in which the notion behind the recruitment bonus is that you are going to bring so much business to my firm, I'm giving you the bonus in order to have you bring this business in connection with” the broker's move, Mr. Hauser said. “And you are essentially advising customers to change their investments. To make that happen they are investing in different products, they are investing in different account types.”

“You are moving them to new investments, and you are doing it because you feel that's what you need to do to get the recruiting bonus,” he said. “That's the kind of circumstance I think that brought” the recruitment bonus to the list, Mr. Hauser added.

“I'm not going to tell you that it never happens, but it's a rare event when transactions or sales happen with clients just to make the adviser's transition to a new firm better,” said Danny Sarch, an industry recruiter. “They don't want to open themselves up to a complaint.”

Several years ago, the wirehouses often had their own proprietary, in-house mutual funds and didn't allow those funds to be carried to a rival firm, Mr. Sarch noted. Therefore, when an adviser moved from wirehouse to wirehouse and clients owned proprietary funds, they were sold new investment products and fresh commissions would be charged.

The wirehouses have moved away from that practice, he said. “Firms don't really have their own proprietary funds any more. And the industry compromised a while ago and allowed brokers [with clients who] still held in-house funds to transfer them to another firm.”

Will recruitment compensation be a non-starter or a big issue under the DOL fiduciary rule? It depends on whether the industry has truly moved away from the dubious practice, as Mr. Sarch contends, or whether it's still happening frequently.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

The biggest obstacles young baby boomers face in retirement

Deputy editor Bob Hordt and senior columnist John Waggoner discuss how pensions, college expense and aging parents are uniquely challenging for younger baby boomers as they prepare for retirement.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

One adviser's story of losing his son to the opioid epidemic

John W. Brower, president and CEO of JW Brower & Associates, shares the story behind his son's death from a heroin overdose and how it inspired him to help others break the cycle of addiction.

Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code.

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print
This story is part of XMore ▲