Recruiters like myself often get questions from broker-dealer reps considering a move that begin, “Is it normal that my broker-dealer…?” Broker-dealers can be notorious for giving advisors answers that smack of corporate clichés such as, “We’re making these changes to be in line with our competitors” or “Regulators are requiring us to make these changes.” We thought it would be useful to bring to light nine common questions we, as recruiters, get from reps as they try to solve the puzzles of costs, company policies and supervision.
1: Our BD passes through 12b-1 trails on mutual funds in advisory accounts with non-qualified assets, but not qualified assets. Is it true that legally they are not allowed to pass through qualified 12b-1 trails?
It’s partially true. Broker-dealers are not allowed to pass through 12b-1 trails on ERISA assets such as 401(k) mutual fund 12b-1 trails. However, on IRA, 403(b) and 457 accounts they can pass 12b-1 trails through to the advisor. There are a few firms that don’t pass through any qualified 12b-1 trails and funnel those trails back to the client. For many firms though, those trails become part of the broker-dealer’s profit center.
Our survey of large, medium-sized and small broker-dealers found that most of the large independent BDs did not pass through qualified 12b-1 trails, while numerous small and mid-sized broker-dealers paid out both qualified (non-ERISA) and non-qualified mutual fund 12b-1 trails.
2: Do other firms require their reps to take the “AI Insite” alternative investment test?
Over the last six months, we’ve seen a spike in the number of BDs requiring the AI test for reps wanting to do alternative investments. With so many arbitrations centered on the issue of reps not being knowledgeable about what they are selling and how they are selling it, any options for educating reps is an appropriate part of a BD’s risk management.
We found many larger firms require the AI test if reps want to do alternative investments. Small and mid-sized firms may or may not require the test, or it’s left up to the advisor to decide whether to take it.
3: Are other firms charging $3,000 for errors and omission insurance?
Unfortunately, $3,000 is the new “normal” fee from BDs for E&O coverage, especially if it sells sizable amounts of alternative investments or has had numerous recent arbitrations. Deductibles are climbing to rates we’ve never seen before, with some firms imposing deductibles on alternative investment-related complaints as high as $300,000, with $50,000 increasingly common. With the flow of arbitrations expected to decrease in 2014, perhaps we’ll see more reasonable rates return in 2015.
4: Is it common for new client account forms and variable annuity forms to be in the 10- to 15-page range?
We’ve actually seen reps leave firms over excessive length of forms. A financial planner explained to me that unusually long forms can breed mistrust in the client as they wonder, “What kind of shoddy investment is this if it needs so much disclosure?” The majority of the small and mid-sized broker-dealers we’ve surveyed had new client account forms in the three- to five-page range, while variable annuity app/switch forms ran in the range of two to five pages. The worst offenders were larger broker-dealers.
5: My BD limits reps in how much of a client’s investable assets can be invested in alternatives to 20% and 10% for clients over age 70. How does that compare to other broker-dealers?
The most common percentage restriction we found in our survey was 25% and 15% for clients 70 and older. For firms with a strong focus on alternative investments, it’s common to have the percentage restrictions defined as soft limits, with reps able to invest higher percentages on a case-by-case basis.