A group of 150 advisors have sent a letter to the SEC claiming that Rule 2243, which would require advisors to disclose recruiting bonuses, will cause clients more harm than good. The comment period has ended and the SEC has until mid-May to rule, although it can extend that period. The advisors are concerned that the rule would stifle competition and hurt succession planning.
You might wonder why FINRA members would be concerned about letting their clients know about how they are compensated, and why they would believe that any effort to hide compensation information is questionable. The advisors argue that to a large extent, recruiting bonuses cover the expense of transitioning broker dealers — a process that we all know is costly and painful. In addition, when a senior advisor wants to retire, the bonus can help with succession planning.
So while clients might think that their advisors are moving to enrich themselves, the money may not be going into their pockets. The rule may stifle competition and actually hurt the client, since the advisor may be forced to stay at a firm — which may not be not in the client’s best interests. Some argue that there are very few enforcement actions focused on recruiting bonuses and no demonstrated harm to clients, leading others to suggest that the bonuses should just be reported to FINRA for review.
Larger BDs’ views of the rule are mixed, but generally they support the rule but have concerns about its potential negative impacts — such as investor confusion about upfront and future payments, for example.
