If your broker changes firms, stay or go?
If your broker (also called a “financial adviser”) works at a large brokerage firm and decides to change firms, you can expect that he or she will ask you to transfer your accounts to the new firm.
If you like your broker (most people I meet say they do), is that enough of a reason?
FINRA (the Financial Industry Regulatory Authority, which regulates the brokerage industry) believes that there is a lot more to consider — one being the conflicts of interest caused by recruitment incentives paid to the broker by the new firm.
Quoting from FINRA’s “Issues to consider when your broker changes firms”:
“Some firms pay brokers financial incentives when they join, which could include bonuses based on customer assets the broker brings in, incentives for selling in-house products or a higher share of commissions.”
Are these payments legal?
Yes, they are. “While there’s nothing wrong with these incentives ... they can create a conflict of interest for the broker,” said FINRA.
The conflict is simple: If the broker is paid a recruitment bonus by the new firm, the firm will want to recoup the investment. That means there will be production requirements built into the recruitment package to make sure the broker delivers revenue to the firm to more than cover the firm’s investment.
These incentives are part of the business model. Brokerage firms compensate brokers based on the revenue they produce for the firm.
A broker who does not meet production goals after getting a recruitment bonus can be required to pay back all or part of the bonus. For example, the “bonus” can be in the form of a forgivable loan; if goals are not met, will the loan be forgiven? That’s definitely something to think about before a customer makes a move.
Another issue is whether your holdings are transferable to the new firm.
According to FINRA: “Some products, such as certain mutual funds and annuities, may not be transferable. If that’s the case, you’ll face an additional decision if you follow your broker to the new firm: whether to liquidate the non-transferable holdings or keep just these holdings at your current firm. Either way, there could be costs to you, such as fees or taxes if you liquidate, or different service fees if you leave some assets at the current firm. Your broker should be able to explain the implications and costs of each scenario.”
There are other considerations as well, such as the costs of doing business at the new firm may be different from what you are used to, product offerings may be different, and the level of service may be more or less than you receive at your current firm.
These considerations arose out of FINRA Rule 2273, which was enacted in 2016 in part to give you more information when confronted with the decision of making a move to a new firm to follow your broker.
Since broker switches from one firm to another are not infrequent, ask your broker what’s on his or her mind about changing firms. Understand why your broker is making a change and how it will affect you before going forward. You’ll want to consider your options well in advance of the move.
To read FINRA’s mandated disclosure, go to finra.org/sites/default/files/Broker-Dealer-Recruitment-Disclosure.pdf.
To read the rule that the disclosure is based on, go to finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-16-18.pdf.
Also read Regulatory Notice 19-10 issued April 5, 2019, “Customer Communications: FINRA Provides Guidance on Customer Communications Related to Departing Registered Representatives.”
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (email@example.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.