Front-End Bonus Payments May Need To Be Disclosed


If your broker or financial adviser told you he was moving to another brokerage firm and asked you to move your account there, would you want to know if he was being paid thousands or millions of dollars to make the move?  The Financial Industry Regulatory Authority (FINRA) thinks so, and is proposing a new rule that would require such disclosures under those circumstances.

Competition among brokerage firms for high-revenue-generating brokers is surging, and that is driving up the financial incentives being offered to those brokers (“Brokers Face Pay Disclosures,” Julie Steinberg, Wall Street Journal).  The brokers that have a track record of generating the most revenue receive the most generous compensation packages.  The enhanced pay packages usually take the form of a cash bonus plus a big-dollar loan, the pay-back of which is forgiven in annual installments (if the broker leaves the firm during the term of the loan, he must repay a portion of the loan that has not been thus forgiven).

Of course, what is being rewarded is not how successfully the broker makes money for the clients, but how successfully he makes money for the firm (and himself).  The clients that generate the revenue for top-producing brokers are as much of an asset as the broker to the acquiring firm.  Therefore, firm-jumping brokers try very hard to persuade clients to follow them, and the former firm tries just as hard to persuade them to stay put.

Clients usually have no idea when their broker stands to receive millions of dollars to switch firms.  For example, Credit Suisse is thought to have paid $20 million to obtain a star broker in 2008.  FINRA’s proposed rule would require a broker to disclose his compensation arrangement to the clients he is asking to move with him to another firm if the “enhanced compensation” is worth at least $50,000.

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.