Ron Rhoades was kind enough to post a thoughtful comment to my Oct. 31 blog, “The Bonus Debate,” about whether brokers should be forced to disclose their recruiting bonuses to clients. As usual, his position is well-reasoned and knowledgeable, but what isn’t so usual is that I find myself on the other side of this particular issue. But before we get to that, let me first say that I have the greatest respect for Ron as one of the foremost thought leaders in the financial planning community, and that his untimely resignation as chairman of the NAPFA Board was both a loss to NAPFA and the profession. With that said, I have to admit that his thinking about broker bonuses leaves me a bit puzzled.
If you haven’t had the pleasure of reading any of Ron Rhoades’ work, the beauty of his writing is that he never leaves the reader in doubt of what he thinks or why he thinks it. His comment to my blog is no exception. His argument is broken down into a five-point logical format worthy of Aristotle:
1) Recruiting bonuses have to be paid out of some revenue stream;
2) That revenue has to be obtained from clients somehow;
3) That creates a conflict of interest;
4) All registered reps who provide personal investment advice are “highly likely” to be fiduciaries under state common law; and
5) Therefore: If a fiduciary status has attached, all material facts such as this conflict of interest must be disclosed.
Ron sums it up this way: “Hence, payment of a recruitment bonus, because it puts pressure on the firm and/or the advisory to promote certain proprietary or other [high-cost] products is a material conflict which must be disclosed.”
In a fairness, it’s a powerful argument: the payment of bonuses by brokerage firms does undoubtedly create pressure for brokerage firms to boost their revenues through the only available channel: their clients. But to my mind, its weakness is that it unfairly focuses on recruiting commissions as if they are the sole cause of as conflict arising out of a brokerage firm’s need to maximize revenues generated by its clients.