Should Brokers Be Forced to Disclose Their Bonuses to Clients?

Elzweig, in a separate interview, strongly denied higher costs resulting from upfront bonuses are a relevant regulatory concern.

“Wirehouses disclose fees and commissions to investors,” Elzweig says. “Those who feel that charges are too high relative to the value that they’ve received are free to go elsewhere and they often do.

“There’s no mystery about wirehouse cost structures,” he adds. “The percentage of firm revenues that is reserved for compensation is a constant , hot topic on Wall street. It’s regularly discussed in newspapers every quarter when firms report earnings and  Wall Street research and  annual reports regularly offer additional details. Investors who are interested have lots of access to this information.”

As a recruiter with nearly three decades of experience, Elzweig is most put off by the notion that upfront bonuses should be regulated, and considers the idea of wirehouses ending the broker bidding war just wishful thinking.

“This idea was kicked around by Arthur Levitt’s SEC back in the ’90s and then tossed,” he says. Nobody was able to show that the payment of lucrative signing bonuses to advisors harmed clients in any way.

“Also, major wirehouses found that they couldn’t trust each other [not to pay upfront bonuses] any more than members of the OPEC cartel could rely upon one another to remain firm on a certain price for a barrel of oil. Competition makes things better – it’s the American way,” Elzweig says.

For his part, Burns agrees the wirehouses would be unable to stop the competition without “the SEC or FINRA taking the initiative to propose limits on bonuses or disclosure requirements to disclose that [brokers] may have to push proprietary programs.”

But Elzweig considers the product-pushing argument passé.

“Wirehouse brokers typically can offer clients access to over 1,000 outside managers in mutual funds and SMAs,” he says. “While that’s not as broad as the choices that RIA custodians offer, still it’s a far cry from ‘product pushing’…The days of wirehouse brokers pushing in-house funds for hefty commissions are long gone,” Elzweig says, citing Citigroup’s sale of its Smith Barney brokerage division as the turning point.

“Other than IPOs, which many investors crave, and some structured products and alternative investments, wirehouse brokers don’t sell proprietary products,” he adds.

Disagreement Over Disclosing Compensation

Short of banning bonuses, Burns said the “less radical solution” of forcing disclosure would be in sync “with all the talk recently of harmonizing disclosures between advisors and brokers.

Burns said it would also inject fairness into an advisory landscape where brokers must meet production quotas to pay for their bonuses while RIAs bill on fee business.

Once again, Elzweig was having none of it.

“If advisors are required to publicize their compensation, why shouldn’t attorneys, doctors and other service professionals operate under the same strictures? Such an unjust, foolish rule would harm investors by encouraging talented individuals to seek careers elsewhere,” he said.

“These are sour grapes proposals,” Elzweig concluded. “Wirehouses control the lion’s share of retail assets for a reason. Many brokers find the wirehouse model of household name, full-service platform, turnkey environment  and big upfront deal to join to be a very potent combination.

“The RIA model has many attributes, but just can’t compete with the wirehouses on recruiting packages. It’s a better strategy for RIAs who want to hire brokers to face that fact head on and instead focus on the many strengths of their model. Recycling long ago discarded proposals and making tortuous arguments just won’t get it done.”

Burns, unsurprisingly, demurred.

“It’s really just about the clients,” he said. “Perhaps the client should be made aware of the recruitment deal at stake so they can be fully informed consumers.”