More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
Brokers and advisors wasted little time weighing in with their comments—both critical and supportive—of FINRA’s controversial plan to require brokers to disclose their recruitment compensation packages.
On Jan. 4, FINRA requested comments on its proposed rule, Regulatory Notice 13-02, which would require member firms to specifically disclose the financial incentives they give to the representatives they recruit. The recruiting firm would be required to provide the disclosure before the rep’s former customers transfer their accounts to the new firm.
The proposed rule states that “FINRA believes that customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms.”
But rep William Edde shot back in his comment letter that a regulatory agency like FINRA “should keep its nose out of” what reps are paid to move from one firm to another. “Given that someone would have to make a herculean effort to demonstrate that a transition bonus adversely impacts clients in any way, shape or form, transition compensation is a glaring example of one of those areas,” Edde wrote.
Former SEC Chairwoman Mary Sharpiro, Edde continued, “had it right when she said that the concern with transition bonuses is that supervisors must be on the lookout for advisors who begin churning accounts or moving clients into higher fee products to boost their trailing 12-month production.” The argument, he said, “was and is that brokers might be tempted to do one or both of those things in an effort to either qualify for, or be awarded, a higher transition package.”
FINRA, Edde said, “seems to be blind to (or deliberately ignoring)” the fact that “supervisors are already expected to be looking out for those activities, and they are already both violations under current code. Arguing that it is ANY of a client’s business, let alone a concern, that a professional is offered compensation in order to change firms is nothing short of ludicrous.”
Glenn Taylor of Coto De Caza, Calif., agreed, stating in his comment letter that “financial consultants are under enormous pressure to perform in the most regulated industry in this country (I wish the medical profession was as regulated).” If financial consultants “happen to beat the odds and build a successful business, they shouldn’t have to disclose anything that has no bearing on them performing their job, interacting with clients, or in general helping them and their families.”
But fee-only planner Troy Bute of Capstone Financial Advisors in Downers Grove, Ill., argued in his comment to FINRA that over the years, he has seen “how the compensation structures of my commission-based and fee-based competitors have influenced the advice provided to clients that follow their advisors from one firm to another.”
Each time the advisor switched firms, Bute continued, “I sat through presentations by the investment advisor in which he espoused how moving to the new firm was going to provide him with more and better alternatives to our mutual client. In our case, we use this investment advisor in a very limited role, minimizing the investment options he is allowed to implement on behalf of the family.”
While Bute says he doesn’t believe that the client “has been harmed in these transitions, we have had to ‘negotiate’ new pricing structures each time a change has been made. My guess is that other clients that don’t have a fee-only firm like ours involved in their planning wouldn’t be experienced enough to know the right questions to ask or the proper due diligence to perform when transitions like this occur.”
Bute went on to explain that the “transitions” his firm has seen “often involve certain minimum amounts of assets that have to transfer to the new firm or certain minimum amounts of revenue attached to asset transfers in order for the incentive payouts to fully vest for the broker/investment advisor.” Said Bute: “I have a hard time understanding how this can be beneficial for the client, particularly when it happens repeatedly.”
It’s not “too much to require that an investment advisor disclose to his or her clients how they are being compensated if part of their advisor’s compensation is determined by whether or not the client moves their investment assets to the advisor’s new firm,” Bute said. “Clients should be allowed to be in a position to ask the appropriate questions of their advisors anytime, especially if their advisor changes firms.”
FINRA announced Nov. 29 that its board would be mulling such a rule at its Dec. 6 meeting. Comments are due to FINRA on the proposal by March 5.
Check out Bob Clark's opinion on the Disclosure Plan, What’s Behind FINRA’s Newfound Move on Disclosing Broker Bonuses?, at AdvisorOne.