Firms Diverge in Disclosing Signing Bonus Conflicts in New Disclosures


June 30, 2020

The short Customer Relationship Summary documents that clients and prospects are receiving as part of the Regulation Best Interest complex of rules that are effective today differ substantially in referencing recruiting bonuses tied to transferred assets.

Form CRS, a four-page document that summarizes fees and costs along with services provided and material conflicts, includes a section titled, “How do your financial professionals make money?”

Clients and prospects pitched by brokers who have moved to UBS Wealth Management USA, Merrill Lynch and Raymond James could learn from the document that there is an extra incentive for the broker if they follow, while those at Morgan Stanley, Wells Fargo Advisors and Ameriprise Financial would not. 

That is because the Securities and Exchange Commission, which requiring specific wording in headings and on some broker conversation starters, gives firms wide latitude in determining the scope of disclosure, and recruiting loans are not mentioned per se in its compliance guidelines.

“Firm A might think it is prudent to make the disclosure, but firm B might say they don’t think it’s a conflict and could be used against us in 18 months by a claimant’s lawyer or regulator,” said Barry Temkin, a partner at Mound Cotton Wollan & Greengrass LLP in New York. 

Consider the differences, as documented in forms that firms have created and begun sending.

Newly recruited brokers from other firms “generally receive a significant amount of additional compensation as an incentive to move” based on revenue generated at the broker’s prior firm and assets that transfer,” UBS Wealth Management USA says in its CRS notice. 

The U.S. arm of the Swiss banking giant has around 6,000 brokers and as of the end of last year had $2.1 billion of “forgivable” recruiting loans on its balance sheet. The loans reflect upfront payments as well as bonuses on the back-end for hitting asset-transfer and production targets. 

Raymond James & Associates, the employee brokerage division of Raymond James Financial that has been an aggressive recruiter of veteran wirehouse brokers in recent years, is more expansive about the recruiting bonus.

“This creates incentives for financial professionals to encourage you to move your assets to Raymond James and to produce greater revenues by charging higher fees and engaging in commission-generating securities transactions,” the firm writes of the unit, which has about 3,200 brokers. 

On the other hand, Morgan Stanley Wealth Management, the biggest wirehouse with some 15,400 brokers and about $3 billion of “forgivable loans” on its balance sheet, does not mention the incentives in CRS document. 

 A spokeswoman for Morgan Stanley declined to comment.

Wells Fargo Advisors, which has been offering premium signing deals with back-end asset-transfer targets to replenish its brokerage force of around 13,600, similarly leaves out mention of incentives to new hires. 

“We believe the form speaks for itself,” Wells spokeswoman Shea Leordeanu said in an e-mail. 

Merrill Lynch Wealth Management, which has been on an experienced-broker recruiting hiatus for more than two years, tersely notes in its CRS disclosure that some advisors “at particular points in time” may receive bonuses based on assets transferred and revenues generated.

Ameriprise Financial, which recruiters say offers some of the highest asset-transfer deals on the Street among its peers, similarly avoids the topic in its Form CRS. Ameriprise recorded $645 million of “forgivable loans” among its nearly 10,000 brokers at the end of 2019. An Ameriprise spokeswoman did not immediately return a request for comment. 

Recruiting incentives have long been a hot-button issue in an industry where “forgivable” recruiting loans can reach as high as three times an advisors’ annual fees and commissions in upfront and back-end bonuses at their former firms. The Department of Labor had sought to ban back-end bonuses tied to asset transfers as part of its now-defunct 2016 fiduciary rule, and the new fiduciary rule proposed by the Trump Administration this week does not address the issue.

The Form CRS and Reg BI rules from the SEC have been criticized by Investor advocates for their lack of specificity in even defining “best interest,” while industry lawyers worry that the vagueness of the enabling language from the regulator could invite enforcement actions down the road.

“The SEC staff should not be surprised to see a variety of disclosure,” Michael Koffler, a partner at Eversheds Sutherland said in a recent webinar on how firms should determine just what constitutes an investment recommendation under Reg BI that would require sending new disclosure documents to customers. “It makes line-drawing extraordinarily difficult.”

Adding to the Form CRS challenges is the fact that it aims to digest into four pages the wide range of the broker-client relationship. 

“I don’t fault firms for struggling to figure out how to do this because it’s a badly conceived document,” said Barbara Roper, director of investor protection at the Consumer Federation of America. 

Big firms whose representatives are registered as both financial advisers subject to a fiduciary standard and as brokers subject to a best-interest standard could easily fill up ten pages describing potential conflicts depending on which hat an advisor is wearing, she said. 

The U.S. Court of Appeals for the Second Circuit on Friday denied an attempt by XY Planning Network and some state securities regulators to invalidate Reg BI on grounds that it did not comply with the intent of the Dodd-Frank Act because of its failure to set a uniform  customer-care standard for brokers and investment advisers. 

The industry has successfully fought earlier attempts to keep recruiting bonuses out of the public eye. 

The Financial Industry Regulatory Authority in 2014 proposed a rule that would have required brokers to inform clients about how much they were paid to move firms. After strong industry pushback it modified the rule to require only the sending of an “educational communication” that broadly mentions asset and revenue-based bonuses.

“While there’s nothing wrong with these incentives in either case, they can create a conflict of interest for the broker,” the Finra document says. 

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