April 7, 2014
As an independent financial advisor, I support regulatory efforts aimed to protect investors. I agree with FINRA`s goal to disclose material conflicts of interest to investors; however I have concerns with FINRA`s proposed rule on recruitment compensation disclosure. I am concerned that FINRA`s proposed rule will create problems that will outweigh its benefits and will give investors the mistaken assumption that a material conflict of interest exists in every situation where an advisor accepts recruitment compensation.
The proposed rule would require me to provide a disclosure form specifically related to recruitment compensation to former clients if I were to `attempt to induce` them to transfer assets to the firm that recruited me. The disclosure would include the amount of compensation I was paid upfront by my new firm and/or the aggregated potential future payments I will be paid by the broker-dealer as part of our arrangement. My new firm would also have to report to FINRA if I receive either a $100,000 or 25% increase over my prior year`s compensation. FINRA has proposed this rule out of concerns that recruitment compensation paid to me creates a conflict of interest that may keep me from working toward my clients` benefit.
There are several things about this rule proposal that cause me concern. Specifically, I`m concerned about the following:
Recruitment Compensation Does Not Automatically Create a Conflict: Compensation paid to an advisor over $100,000 in upfront or future payments would trigger the disclosure requirement. It is true that some recruitment compensation arrangements will present conflict of interests. However, not all arrangements present these issues. For example, advisors often receive reimbursement to cover the direct and indirect costs they may incur during the transition period when they are transferring firms and cannot work. Firms may also use recruitment compensation to assist an advisor taking over the business of a retiring colleague as part of a succession plan. As a result, I find the disclosure, as proposed, troubling and I request that FINRA utilize a more precise method for identifying and addressing recruitment compensation arrangements that raise material conflicts of interest.
Recruitment Compensation Is Not Income: The required disclosure does not properly account for the amount of time I am not in a producing role while I transition firms. Most importantly, it fails to explain that the recruitment compensation will cover costs that would typically be paid by my clients if they were to transfer their account to the new firm (e.g., account closing and/or transfer fees). Nor does it explain to my clients that the recruitment compensation may be intended to cover various costs I will incur as a small business owner when I transition to the new firm. These costs include new technology expenses, business cards, letterhead, signage, temporary staff during the transition, etc. While I may receive a pay-out for switching firms, the money does not go into my pocket as income, but rather goes toward supporting my business and my clients. While the proposed rule language would allow advisors to subtract direct costs from the calculation of compensation, the language must be clearer with respect to lost revenue and the indirect costs incurred by advisors during a transition.
The Disclosure Will Violate My Privacy: As an independent financial advisor, my clients live and work in the same community as me and I often maintain both a personal and professional relationship with them. FINRA`s rule would force me to disclose part of my income to them, putting me and my clients into a personally and professionally uncomfortable and unnecessary position. This information can be provided to FINRA rather than my clients in order to elicit enhanced supervision or examination. This way FINRA could examine potential conflicts of interest and enhance investor protection without causing me potential professional and personal embarrassment.
The Proposed Rule will Stifle Competition and Threaten Succession Planning: If this rule is enacted as proposed, it will have a chilling effect on financial advisors moving to new broker-dealer firms. This requirement will cause financial advisors to remain at a firm so as to avoid professional embarrassment and an invasion of privacy, even if leaving would serve their clients` interests. It would also have the unintended consequence of threatening advisors` succession planning in instances where a firm provides transition assistance to an advisor taking over the clients of a retiring colleague. This will have a severely negative impact on clients who have advisors nearing retirement.
In addition, recruitment bonuses are common in both the public AND private sector. Both of these sectors want the best people they can get and are willing to pay to get them. The military has given recruitment bonuses for years. Companies recruit folks from other companies, utilizing a bonus as an enticement.
The "Bonus", or, in most cases, a "Foregiveable Loan" is not paid by the client nor charged to the client. It is paid, and foregiven, by the Broker-Dealer, or the "Firm". This rule change would create so much confusion, whereby the clients would be under the assumption that they were somehow getting charged extra fees to pay the broker a bonus.
For these reasons, I believe the rule proposal is overly broad and will have a negative impact on clients without providing them with enhanced investor protections. Therefore, I hope FINRA will pursue other means of addressing conflicts of interest in recruitment compensation arrangements.
Thank you for considering my comments.
Sincerely,
Timothy Sullivan
Registered Principal
Monarch Wealth and Retirement