September 22, 2014
By Melanie Waddell, ThinkAdvisor
New plan requires recruiting firms to provide a FINRA-created educational communication to former retail customers of a transferring rep
The Financial Industry Regulatory Authority issued for public comment on Friday a proposal that curtails its earlier draft rule requiring, in most cases, disclosure of recruitment bonuses and incentives.
The proposal would require recruiting firms to provide a FINRA-created educational communication to former retail customers of a transferring representative who are considering transferring assets to the rep’s new firm.
Patrick Burns, a lawyer for breakaway brokers, says that the proposed FINRA-created communication would highlight the potential implications of transferring assets to the new firm and suggest questions the customer may want to ask to make an informed decision.
“Among other things, the suggested questions relate to the costs the customer may incur, investments that may not be transferrable, and financial incentives the broker is receiving that could influence his or her recommendation to transfer assets or the products or services that might be suggested to the customer at the new firm,” Burns says.
Many clients, Burns continues, “may not know what to ask their broker, or if they do, be reluctant to ask tough questions which would have been answered by mandatory disclosure,” required by FINRA’s original draft rule on recruitment compensation.
The new proposal, Burns says, “should leave no doubt that FINRA stands squarely behind the interests of big brokerages and that [the self-regulator is] not well suited to regulate advisors,” which FINRA has lobbied hard to do.
Jon Henschen of the BD recruiting firm Henschen & Associates told ThinkAdvisor in a Monday interview that “disclosing of [broker] bonuses was not client perpetuated, it was regulatory driven. There’s no point to it — clients just care about their account and if the broker is doing a good job.”
He noted that one area of broker bonuses that should be addressed — and where firms are changing policy — is connecting the bonuses to production levels. ING — now Voya — “recently changed their bonus program making the bonuses based only on time (five to seven years) with no production level requirements during the note period. Most [upfront forgivable promissory] notes at independent firms require the rep to maintain 80% of the amount the note is based on or more during the note period.
“The reason regulators do not like the link to [a rep’s] production is conflict of interest, i.e. ‘Did you transact business with your client in order to hit the production requirements of the note?’” Henschen says.
“LPL and Geneos are also examples of firms that offer upfront notes with no production requirements,” he continues. “The wirehouses and firms like Ameriprise offering up to 360% notes would have a very difficult time not tying production requirements to their notes, but for the independent channel [it’s] not such a big deal when notes tend to top out at 30% of trailing 12” — the total commission generated over the last 12 months.