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Brokers Get Their Feathers Ruffled

Back in January, FINRA proposed a rule that force brokers to disclose incentives (like signing bonuses, transition assistance, accelerated payouts and front or back-end bonuses) when they move from one firm to another. Specifically, the rule would require them to disclose that compensation to new clients who they sell investments to for the first year at their new firm.

The brokerage industry was able to submit comment letters to FINRA on the proposal, and the deadline to have them in was last Tuesday.

And like clockwork at the 11th hour, two industry lobbies handed in their criticism of the rule. Both basically claim that recruiting bonuses aren’t always a conflict of interest. The National Association of Insurance and Financial Advisors claimed that the focus on compensation overshadows other things like a firm’s “platform, products and services”. And just because a broker happens to get a nice big paycheck for switching firms, that should not “call into question the motivation behind such a move or serve as an indication that any such move was made for any reason other than the best interests of…the clients”. NAIFA also suggested that brokers should not be required to make the disclosure at the time a client opens an account.

So NAIFA thinks that investors should assume it just might be for their own good when their broker gets a payday for jumping ship to a new firm and selling the new firms products to them. And investors should make the decision to open that new account without having the relevant information about what that broker got paid until after the fact.

The Securities Industry and Financial Markets Association was less direct in its letter saying that “the most important and relevant information for the client is to understand the potential conflict associated with the payment” and that “disclosure of the potential conflicts themselves should be the centerpiece”. In other words, the amount of money isn’t the problem. The only thing investors need to be told is that there is a potential conflict of interest…not how many dollars their broker pocketed because of that conflict.

Recruiting bonuses (and what they add up to) are a potential conflict of interest between a broker and an investor, plain and simple. The brokerage industry proved last week that they have no compelling argument against that reality.


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