The Skinny on the FINRA Advisor Bonus Disclosure Rule

As an executive recruiter who works with financial advisors,  we’re often asked for our take on this hot topic. FINRA has approved a rule change that would require advisors to disclose to clients any recruitment compensation of $100,000 or more paid to them as an incentive to join a new firm. The disclosure would be required for the first year to any customers that choose to follow the advisor to their new firm. FINRA is waiting for the SEC to approve the rule change which they are expected to do  by year’s end.

Click here to view the FINRA Rule:

It seems that FINRA has succeeded in discovering a “customer abuse” that no customers have  ever complained about. Remember all those teary eyed press conferences in which investors complained that their advisors changed firms too much? You know, the ones in which investors recounted the dastardly strong arm tactics that their advisors employed to get them to sign the transfer forms? Funny, we can’t remember them either! This is strictly a FINRA manufactured issue in search of a solution.

We don’t see the adoption of this rule as changing the recruiting marketplace all that much. We’ve yet to meet an advisor who couldn’t articulate to clients the value proposition of why their new firm is  a better place for them to service their accounts. Competent advisors are in control of client relationships. Once this rule is adopted, advisor departures may slow initially. But as more advisors successfully hit the bid elsewhere, complying with this rule will become just another part of the new normal. Once upon a time , wirehouse advisors who went independent were viewed as trailblazing pioneers. Now independence is  almost just another familiar option. Wirehouse executives who mistakenly view the bonus disclosure rule as a poison pill that will slow recruiting are likely to  be disappointed.

In our view, the main effects of the new bonus disclosure rule will be these:

1. Advisors with shaky client relationships will be intimidated and will be more likely to stay home. These advisors are too preoccupied with putting out fires on the home front to move  anyway.  Advisors who know that they can’t deliver the goods usually don’t move.

2. There will be less advisor movement in down markets.  It’s always been tough to move when client portfolios are in the tank. It’s now going to be exponentially more difficult. You can imagine a client thinking, “Hey my accounts are getting creamed and my advisor just got a humongous signing bonus. What’s wrong with this picture?”

3. If an advisor wants to return to a previous firm, they’d better have an especially good reason as to why the old firm is now new and improved.

4. Some advisors will favor a change to a different type of firm because it’s an easier sell to clients. If you’re a wirehouse advisor,  joining a high end boutique,regional broker dealer,  or going independent just got more attractive.

The bottom line is that advisors who are confident in the value that they provide to clients and in the strength of their relationships will  continue to enjoy the same level of freedom to choose their desired channel and firm. A recent Spectrum survey, underscores just how solid advisor client relationships tend to be  during this bull market.

Click here to View the Spectrem Survey

That’s good news for advisors of all stripes whether they are considering a move or not.

About Mark Elzweig

I am an executive search recruiter with an inside track on financial advisors, the asset management industry, and Wall Street. My work has appeared in numerous publications including On Wall Street,AdvisorOne, and Fund Fire. Journalists regularly seek me out, so you catch my bon mots in The Wall Street Journal, Research Magazine, Reuters, and more. You can follow me on Twitter @elzweig or you can reach me directly at 212-685-7070 or elzweig@elzweig.com.
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