By George C. Miller, Esq. of Shustak Reynolds & Partners, P.C. posted on Tuesday, June 13, 2017.

George C. Miller

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email: [email protected]

George C. Miller, Esq.
619.696.9500 ex. 105
[email protected]

In May 2017, Merrill Lynch announced plans to do away with large, up-front recruiting bonuses before the June 9, 2017, implementation of the Department of Labor’s (DOL) new fiduciary rule. That rule will require firms and registered representatives to act in the best interests of their clients and prohibit certain transaction based compensation in retirement accounts unless the requirements of an exemption are met. Guidance from the DOL suggests that up-front bonuses, which firms historically have used to lure advisors–and their book of clients–away from competing broker-dealers, may run afoul of the rule.

While the DOL fiduciary rule officially went into effect June 9^th, the Department of Labor has publicly stated it will not enforce the rule until January 1, 2018, at the earliest, after firms have had an opportunity to make required disclosures to customers and update their customer agreements. The rule’s ultimate fate remains uncertain. The House recently voted to repeal the DOL fiduciary rule in its entirety, and the SEC has hinted at its own forthcoming fiduciary rule proposal.

In shifting away from the traditional recruitment bonus packages, which swelled to 300% or more of a financial advisors gross trailing-12 commission revenues and often totaled millions of dollars, Merrill plans to focus on retaining existing advisors, perhaps through retention bonuses or other compensation incentives to existing employees, and on developing younger advisors through the use of its discount Merrill Edge investment platform. While reports surfaced indicating that Merrill was reconsidering its decision, as recently as June 9^th the firm confirmed it was, in fact, moving away from traditional recruiting bonus structures.

Merrill is not alone in its decision. UBS Financial Services, Inc. previously announced changes to its compensation plan and strategy, including a reduced focus on recruiting bonuses in lieu of higher grid payout rates. Morgan Stanley followed suit, first doing away with “back end” bonuses in 2016 (e.g., bonuses tied to a recruited advisor’s assets and production after joining the recruiting firm) and now announcing a “significant reduction” in its broker recruiting efforts.  Wells Fargo, meanwhile, which faced a hailstorm of criticism following revelations the firm encouraged employees to open millions of fake bank and consumer credit accounts, has doubled down on recruitment bonuses. Its brokerage division, Wells Fargo Advisors, recently announced plans to boost advisor signing bonuses to counter Merrill, Morgan and UBS and take advantage of the current market.

The financial advisor recruitment landscape is in the midst of a shakeup. For the past 20+ years, large up-front and back-end bonuses have been the primary recruiting tool for most wirehouse firms. The practice became so prevalent that even small independent brokerage firms and registered investment advisory firms began offering transition compensation, though nowhere near the dollars offered by the Wall Street firms. But on Wall Street, where the almighty dollar rules above all else, the days of high dollar recruiting bonuses and transition compensation are, in this lawyer’s opinion, likely to return. Perhaps after Congress guts or kills altogether the DOL fiduciary rule, or perhaps after firms have seen significantly reduced profits in the absence of billions of dollars in new client assets funneling into the firm each year.

Shustak Reynolds & Partners, P.C.’s experienced California securities and financial services lawyers are well versed in the financial services industry.  We routinely represent brokerage firms, registered representatives, registered investment advisory firms (RIAs) and others employed in the securities and financial services industry.  Contact our San Diego FINRA lawyers today for a free consultation.

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