Why FINRA’s Pending Bonus Disclosure Rule is Important

FINRA, the broker-dealer’s self-regulatory agency, is considering a new set of rules that would include forcing brokers to disclose bonuses they receive for jumping firms.

It is a not too uncommon practice for a broker with a major wirehouse (let’s say Merrill or Morgan Stanley or JP Morgan) to take their clients to a different firm.  Typically, the broker is getting a very nice bonus for making this switch.  There is an entire sub-industry built around this practice: recruiters from the wirehouses, “placement agencies” whose sole purpose is to help brokers jump ship for a bonus, and brokers who are looking for a nice big payout.

Of course, this bonus money has to come from somewhere.  The broker’s new firm is paying out a huge sum upfront to the broker for moving over.  These funds come from the firm out of an expectation of future commission and fee revenue generated by the broker and paid by the broker’s clients.

A push to disclose these bonuses is absolutely a good thing for clients.  Anyone working with investment clients should be 100% upfront with the client about the cost of doing business and how the broker or advisor is compensated. And clients should be fully aware of any potential conflicts of interest when their broker is being paid to move firms.

More disclosure is just the start of what needs to change in this industry.

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