Investors may resist quizzing brokers about compensation

Investors may not have the courage to ask their brokers how big a bonus they’re receiving for switching firms, potentially undermining the effectiveness of a pending Finra rule proposal, according to experts.
On Friday, the board of the Financial Industry Regulatory Authority Inc. authorized the organization to release for public comment a proposal that would a firm recruiting a broker “to provide a Finra-created educational communication” to investors that would suggest questions they should ask their broker about his or her compensation to “highlight the potential implications” of moving with him or her to the new firm.
The “educational communication” approach is significantly different from the original broker-compensation proposal, which would have required brokers’ new firms to outline compensation packages in excess of $100,000 to clients from the broker’s previous firms.
“I think the whole thing is a joke,” said Patrick Burns, managing attorney at the Law Office of Patrick J. Burns Jr. “It’s just an educational piece that doesn’t disclose anything. It looks like an informational envelope-stuffer.”

Investors will be no more likely to break the societal taboo about discussing salary than anyone else.

“It’s like going to a cocktail party and asking the guy next to you: ‘How much do you make?’” Mr. Burns said.

Patrick Mahoney, a securities attorney who owns an eponymous law firm, said that a list of questions won’t move investors to dig into compensation details.

“I don’t think this is going to properly reflect what the compensation is going to be,” Mr. Mahoney said. “Clients won’t ask those questions.”

A financial adviser said that the original proposal had been diluted to the detriment of investors.

“I think it’s too watered down to have much benefit to investors, unfortunately,” said Jonathan G. Heller, president of JGHeller Private Wealth Advisors. “Investors are unlikely to ask their financial advisers about deal terms. If they do ask, they’re more likely to get a glossed-over explanation.”

A Finra spokeswoman declined to comment. In a video posted on the Finra website, Finra chairman and chief executive Rick Ketchum and lead board governor Jack Brennan said that Finra changed its approach based on feedback from member firms and the Securities and Exchange Commission.
“This is another good example of how the rulemaking comment process works,” Mr. Brennan said in the video. “This revised approach allows Finra to achieve its investor-protection mandate while addressing most of the operational concerns that were raised by comment.”
In June, Finra withdrew the original proposal from the SEC, where it was awaiting agency action. It had received 184 comment letters.
The Financial Services Institute is one group that raised concerns about the initial proposal.
The revision “appears to be moving in a very positive direction,” said Robin Traxler, FSI vice president for regulatory affairs. FSI, which represent independent broker-dealers and financial advisers, supports disclosing fees to clients and informing them about any potential problems with transferring assets.
“The new rule appears to address those two issues without being overly broad,” Ms. Traxler said. Finra’s educational material would “lead clients to an open discussion of the facts they need to know in order to make an informed decision.”

It’s not clear that compensation arrangements would persuade a client to leave a broker, Mr. Mahoney said, given the relationship they’ve built up over the years.

“I don’t think compensation is going to be a deal-breaker for most investors,” Mr. Mahoney said. “There’s already a pretty significant process that they have to endure to move their money [when following a broker to a new firm].”

Related Topics: Financial Industry Regulatory Authority