Caveat Investor: So Your Broker Is Switching Firms...

Say one day your financial advisor calls you up and says, “Hey there! So I’ve got some great news. I’m switching firms and I’d like to take your account with me.” What do you do?

It’s a question that most investors will face at one point or another during their relationship with a financial advisor. Sometimes, more than once. But if you think that just because your broker and your investments stay the same, that everything regarding your investment account as it transfers over to the new firm will stay the same, think again. All too often, investors incur additional and undisclosed costs as a result of transferring with their broker to a new firm. They may also be unwitting lining the broker’s pockets through undisclosed incentives. Switching firms is one of those potentially tricky situations where your interests and the interests of your broker may not be as aligned as they ought to be as part of the fiduciary duty he or she owes to you as a client. And, according to the Financial Industry Regulatory Authority (FINRA), the securities industry watchdog, it’s entirely up to you to navigate that tricky situation. Ok, FINRA is going to help you out a little--but just a little.

According to the latest announcement from FINRA, the agency proposes to force recruiting broker-dealers to supply transferring investors with “FINRA-created communication” designed to help those investors ask the right questions and avoid the most obvious pitfalls. Basically, it’s a buyer-beware policy that puts the onus on clients rather than on brokers and brokerages to ferret out recruiting incentives and hidden costs. Here is the full text of the announcement:

The Board authorized FINRA to publish a Regulatory Notice soliciting comment on a proposal that would require a recruiting firm to provide a FINRA-created educational communication to former retail customers of a transferring representative who are considering transferring assets to that firm. The FINRA-created communication would highlight the potential implications of transferring assets to the new firm and suggest questions the customer may want to ask to make an informed decision. Among other things, the suggested questions relate to the costs the customer may incur, investments that may not be transferrable, and financial incentives the broker is receiving that could influence his or her recommendation to transfer assets or the products or services that might be suggested to the customer at the new firm.

It’s worth mentioning that this announcement marks a sharp revision from the previous proposal by FINRA, which would have required brokers’ new firms to disclose compensation packages of more than $100,000. The new proposals also fails to require firms to disclose incentive packages offered by the jilted firm to brokers who can retain clients left behind by departing brokers.

Based on the new, diluted proposal, for investors whose financial advisors are striking out for greener pastures, it will be your responsibility to arrive at an informed decision. So after your broker calls you up with the “great news,” read your “FINRA-created communication” and ask for an in-person meeting before you agree the news is as great for you as it is for your broker.

If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation at 215 462 3330 or via email by clicking here.