Controversy Over Recent FINRA And SEC Regulatory Actions Raises Questions Of Investor Trust And Also How These Regs Will Affect Clients

Wednesday, January 16, 2013 10:15
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Controversy Over Recent FINRA And SEC Regulatory Actions Raises Questions Of Investor Trust And Also How These Regs Will Affect Clients

Tags: fiduciaries | FINRA | sec

FINRA opened the floodgates to broker rage when it put its Proposed Regulatory Notice 13-02 out for comment on January 2. The comment period doesn’t expire until March 5 but comments are already pouring in.

 
It’s only one of several regulatory events of late. Regulatory reform has been a hot topic since the Dodd-Frank Act was enacted in 2010. We’re hearing quite a bit about the effect these new regs might have on the industry.
 
But what effect will they have on our clients?

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Let’s start with the FINRA disclosure regulation. The proposed new rule out for comment mandates disclosure of the signing bonuses registered reps receive when they move to a new firm.
 
There have been a couple of interesting responses from registered reps so far.
 
One broker said FINRA should keep its nose out of what reps are paid to move from one firm to another and that signing bonuses have no effect on advice given to clients.
 
He said the concern should instead be focused on those who churn accounts or move clients into higher fee products to boost their 12-month production levels so they could qualify for a larger signing bonus.
 
Another rep also mentions the fact that bonuses are determined based on the previous 12-months’ production and ponders if a rep would have to disclose a bonus if he or she remained at the current firm.
 
This rep agreed that signing bonuses have no bearing on the advice given to clients.
 
But at least one fee-only planner has a different view. His comment states observations over the years that commission-based and fee-based compensation has indeed influenced advice to clients who follow advisors from one firm to another.
 
This invites two questions: Is it a conflict of interest for a rep to change firms simply to further his or her career (jumpstarted by a significant signing bonus) and, with trust issues still at the forefront of client-advisor relationships, why wouldn’t a rep disclose a signing bonus along with citing client benefits as part of the reason to move to a different firm?
 
Secondly, there is the December 28, 2012 SEC two-year extension of the non-discretionary principal trading rule. Does that help clarify the issue of trust? Should the practical implications of the extension of that rule also be disclosed to clients?
 
Fiduciary firm fi360 says that non-discretionary principal trading occurs more often than thought and that it creates problems and added costs for investors.
 
The fact is, some less actively trading clients may be better off paying commissions instead of fees.
 
Would reps who charge commissions to some of their clients on that basis receive hefty signing bonuses to change firms and, if so, would they be reticent to disclose it?
 
It is questionable that many clients are even aware of these issues. Even so, is it any wonder clients still are unsure about the focus of our industry?
 
A recent IPI study shows that 28% of wealthy investors are not exactly confident about the investment strategies their advisors have devised for them. Twenty-three percent are flat out concerned. Another 49% are neutral.
 
Whether it’s the fiduciary standard, the bonus disclosure rule, or the non-discretionary principal trading rule, there is a single—and hopefully, obvious—message here.
 
A goodly percentage of investors are so unclear that we, their advisors, are working with their best interests first and foremost at heart that they are moving the bulk of their wealth management either to internal resources or to someone else they know well.
 
This means that there is a serious gap in the client-advisor relationship. Is it up to FINRA and the SEC to close that gap?
 
One rep’s comments about the FINRA bonus disclosure rule stated that investors choose advisors for one of three reasons:
 
a) the advisor is a friend or relative
b) the advisor has been recommended by a friend or relative
c) a firm assigned an advisor to the client when he or she called in
 
Is that really the criteria investors should use when selecting someone to manage the proceeds of their life’s work?
 
Most clients probably are not sophisticated enough to know the questions they need to ask when interviewing an advisor.
 
At the very least, clients should be educated first that they need to do their own due diligence when choosing an advisor and secondly on the criteria that should be included.
 
Who better to offer them that education than you? Is that a differentiating step you could take to rebuild client trust in what seems to be a nebulous industry environment?

 

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