Finra is right to push a rule proposal that would force brokers to tell clients about big signing bonuses they receive when moving to a new firm. Excessive signing bonuses are a dirty little secret in brokerage industry recruiting wars, and it's high time clients were made aware that one reason their trusted broker may be asking them to transfer assets to another firm is that he or she stands to collect a fat paycheck if they do.
Knowing the extent to which brokers are being paid would give clients a more accurate picture of their brokers' motivations for moving to another firm. Too often, clients are led to believe that a switch is motivated by a desire to gain access to better technology, a wider array of products or some other perk from which they, in turn, also will benefit. Nary a word is said about the generous recruitment bonuses that brokers alone reap.
Under the proposed rule, brokerage firms would be required to inform clients moving, or being asked to move, their accounts that the broker's recruitment package included “enhanced compensation.” Examples of such incentives are signing bonuses, loans, accelerated payouts and transition assistance.
The rule would apply only to enhanced compensation of $50,000 or more and would remain in effect for one year after a broker's move.
The proposal comes as both the
Financial Industry Regulatory Authority Inc. and the Securities and Exchange Commission, Wall Street's chief watchdogs, are stepping up efforts to improve transparency in dealings between financial advisers and their clients.
Those dealings are muddled by big signing bonuses, which have become more ubiquitous in recent years. Twenty years ago, big brokerage firms lured brokers to join them with recruitment compensation bonuses totaling 35% of a year's production in fees and commissions. Nowadays, those bonuses are likely to represent anywhere from 150% to 200% of a broker's “trailing 12.”
Whether or not the brokerage industry wants to admit it, outsize bonuses raise conflicts of interest that are not disclosed when brokers encourage clients to follow them from one firm to another.
In an open letter to broker-dealer chief executives in 2009, former SEC Chairman Mary Schapiro addressed those conflicts.
SPECIAL ARRANGEMENTS
“Some types of enhanced- compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given,” she wrote. “For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest.”
Ms. Schapiro's concerns cannot — and should not — be ignored.
Judging by initial comments posted on Finra's website, the brokerage industry won't submit to this rule change without a fight. Some are calling the proposal burdensome. Others say it's unfair — and point to the fact that doctors and lawyers are not required to disclose compensation when they switch affiliations with employers.
Still others are reaching even further.
“We are concerned that unscrupulous clients and/or their attorneys may use a large bonus as a way to extort money from brokers,” John Busacca, one of the founders of the Securities Industry Professional Association, wrote in his comment letter. “A client that 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.”
But those arguments are neither wise nor well-reasoned. If brokers expect to earn the
trust of clients, they must be willing to disclose any and all conflicts or potential conflicts.
