Broker Disclosures Proposed
Washington — Brokers who switch firms would be compelled to tell customers about any recruiting bonuses and other incentives received under rules proposed by industry regulators to protect clients from conflicts of interest.
The Financial Industry Regulatory Authority’s 20-member board of governors voted last week to put the proposal out for comment, according to a memo from Chairman Richard Ketchum posted on the group’s web site. Conflicts may arise if the new firm’s payments encourage brokers to push products to clients that aren’t needed or suitable.
The self-regulatory trade group is reviewing conflicts at 14 of the largest U.S. brokerages, focusing on compensation and recruiting, Finra said in July. Finra didn’t name the firms whose compensation plans are under review. The new rules won’t persuade many clients to drop their advisers, said David Sobel, chairman of the National Association of Independent Broker/Dealers.
“If your doctor’s doing a good job, do you care how much he’s making a year?” said Sobel, whose group counts 5,000 members. “If a broker is doing a good job for a client, the client’s going to go with them.” Michelle Ong, a Finra spokeswoman, declined to comment on the board’s action.
Public disclosure may make brokers seek higher bonuses since they’ll know what their rivals got, Sobel said. “That’s going to be bad for small firms that can’t compete with that kind of bonus money,” he said.
Brokerages typically recruit financial advisers with “forgivable” loans - a kind of bonus that must be repaid if a broker leaves the firm before a specified number of years. In practice, the rule would apply only to larger brokerages that can afford to pay new employees up-front bonuses, said a person with knowledge of Finra’s plan, who asked for anonymity because the voting wasn’t public. Marc Dobin, founder of Florida-based Dobin Law Group, which represents brokers, brokerage firms and investors, said asking brokers to tell about bonuses could lead to rules affecting other compensation and perks.
Following the comment period, which typically lasts one to two months, Finra’s plan would need approval from the Securities and Exchange Commission. “Financial advisers are honorable people,” said Richard Lipstein, managing director of New York-based recruiting firm Gilbert Tweed International.
“Only a small percentage of advisers are going to look at their clients as cannon fodder” and sell them poor investments to get incentive pay.