finra disclosure rules

What's In It For You? Broker Transfer Incentives

The heavily-regulated fiduciary relationship between financial advisor and investor is the bedrock on which the whole system of contractual American investing rests. Without it, brokers could treat your money like it was their own. (Unfortunately, sometimes they still do: click here to see a few eye-opening cases…). But with the core fiduciary relationship in place and the Financial Industry Regulatory Authority (FINRA) perpetually looking over brokers’ shoulders to make sure they honor that relationship, investing money in our great country goes smoothly. Of course, there will always be bumps in the road, including when the fiduciary relationship becomes less straightforward, more fraught with nuance and complexity. This usually happens when the broker’s interest and the investor’s interest become misaligned somewhere. In other words, in certain circumstances, what’s good for you the investor may or may not be good for your broker (like when you push to invest in products with lower fee/commission rates). Or, conversely, what’s good for your broker may or may not be good for you the investor. An example of the latter often occurs when a broker is recruited away from his current brokerage firm by another firm using big incentives. In this case, the first thing the broker will do is call you up and say, “Hey! I just got transferred to this great new firm. You should come jump ship with me!”

Creative Commons

Creative Commons

Maybe. Then again, maybe not.

Recently, FINRA has been pushing for changes in the disclosure rules surrounding recruiting and transfers such as these, for the very reason that while it may be great news for brokers to jump firms because they stand to get a large bonus for bringing their client book with them, it may require you, their client, to liquidate your portfolio and reconstitute it at another firm, incurring surrender charges and opening you up to ugly tax implications, and so on. In other words, bully for the broker. Not so bully for you. That’s why FINRA is considering requiring brokers to disclose any incentive structure from their new firm for up to one full year after transfer to their clients. This way, you know what your broker stands to gain from you transferring, and you can make an informed decision on your own instead of just going along because your broker said so.

While these changes are still on the books at FINRA and are scheduled to be addressed at their meeting next week, they’re also a useful reminder that in the specific situation where your broker has been transferred and asks you to go along with them, even without FINRA behind you, you can ask them to explain to you what’s in it for you. You can even ask them what’s in it for them. Always, always, always keep in mind that your broker is a professional who works for you. We’ve seen far too many cases of broker misconduct or investment fraud perpetrated because customers give brokers way too much deference and leeway. Here, as in any retail business, brokers and customers alike would be wise to remember: “The customer is always right.”

As always, if you or anyone you know has the victim of broker misconduct or investment fraud, please contact us immediately for a free consultation.