Scottrade made a bet that the Labor Department’s fiduciary rule wouldn’t be enforced. It lost. But, for now, there’s another way firms can keep their sales incentives.
Whether or not Scottrade beats the charges it faces under the rule, filed by the state of Massachusetts over the firm’s sales contests, there will be serious consequences for the firm and its advisors. This firm, like many others, elected to adopt the Impartial Conduct Standard of the Labor rule, which prohibits any form of sales incentives. Sales incentives include “quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives.”
At a minimum, for Scottrade the consequences of these charges include the cost of legal defense and the damage to the firm and its affiliates caused by public accusations such as “dishonest and unethical activity.” It is not hard to imagine that the consequences could escalate if other states act in a similar manner and clients achieve class action status or ultimately win awards for damages. Whatever emerges, advisors will be forced to defend these charges to concerned clients and prospects.
While there may be benefit in signing on to widely used practices, in this case there is no protection in numbers. The new Impartial Conduct Standards illustrate the importance for individual firms and advisors to act in their own best interest.
But how does a firm or its advisors operate without sales incentives?
Sales incentives are an essential ingredient of retirement and other investment/insurance businesses. Despite this well-established truism, many firms adopted the Impartial Conduct Standard with the expectation that there would be no enforcement until 2019, by which time the entire rule could be erased. Unfortunately, the no-enforcement policy is limited to the Labor Department and IRS. All 50 states have standing in securities complaints, as do private citizens, making the choice to rely on no enforcement a risky one.