The Financial Industry Regulatory Authority (FINRA) was expected to consider a rule that would require brokers to disclose their bonuses to clients, at its July 11 meeting.
This has however been postponed, according to Investment News.
Under this rule, brokers would be required to disclose details on compensation of $50,000 or more, including signing bonuses, back-end bonuses etc. And the rule would need SEC approval as well.
In an email interview, Simon Roy, president of Jemstep, an online investment advisor told Business Insider that wirehouse support for the rule has more to do with preventing poaching and less to do with transparency. For there to be true transparency, clients need to should have access to more transparent accounting.
Business Insider: Many wirehouses like Morgan Stanley are welcoming FINRA’s broker compensation disclosure rule on the grounds that it brings more transparency. Do you agree?
Simon Roy: Anything that increases fee and compensation transparency on behalf of clients is of value. However, to say that the wirehouses support this proposed legislation on the grounds that it brings more transparency is a stretch. The proposed legislation is expected to reduce poaching of productive brokers from their ranks which could reduce broker compensation costs and increase firm profitability. Wirehouses are like owners of baseball teams looking to reduce the share of revenue paid to high value players. Anything that inhibits large payouts to players benefits the teams who invest in large farm system, i.e., the large wirehouses. Presenting their rationale for supporting this legislation as transparency appears to be a somewhat convenient patina. The real reason is an effort to improve firm economics.
It is worth noting that FINRA is an industry self-governance body and wirehouses have seats on the board.
BI: What in your mind are the benefits to clients? What are the potential conflicts of interest that could arise?
SR: I believe the benefits of this proposed legislation for the client are indirect and not easily quantifiable. Ironically brokers who leave firms are paid a bonus on the previous years’ production so informing clients when they leave does not necessarily reduce the incentive boost production in the prior year.
While I support more transparency for clients, broker bonuses are not the logical starting point. It would be more valuable and actionable for investors to have a transparent accounting of all fees paid on their portfolios held at brokerage firms and the other sources of income earned by brokerages from their portfolios. Clients could use this information to evaluate the services they receive from brokerage firms and be in a position to make changes if needed.
BI: Is there an argument to be made against such a rule?
SR: I do not think there is a really good argument to be made against such legislation but it certainly can be improved to make it more meaningful to investors. I would challenge to wirehouses to propose expanding the legislation in support of transparency to make all brokerage fees and earning off their client’s portfolios openly available to clients.
BI: Is there anything else you think our readers should know?
SR: The reason brokers are paid up to 180% bonuses for moving firms is because they can generate significant revenue for brokerage firms from their client base. The issue for clients is not the level of bonuses brokers are paid to move or to stay, but rather the inability to determine the full cost of doing business with a particular brokerage firm. Clients should know what they are paying and what they are gaining from such fees. The alternative for many dissatisfied with this lack of transparency is to move to Registered Investment Advisors (RIAs) who have a fiduciary responsibility to only take compensation directly from clients and be fully transparent with such fees.
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