DOL Prohibits Deferred Recruiting Bonuses Under New Rule
Recruiting bonuses will face a major overhaul as a result of new guidance that the Department of Labor issued on its impending conflict-of-interest rule on Thursday.
In a long-anticipated list of 34 “Frequently Asked Questions,” the DOL said upfront signing bonuses will be permitted as long as they are paid as a fixed sum and are tied to length of stay. However, payment contingent on meeting particular asset or sales targets —as most are today—can create “acute conflicts of interest” and will be impermissible, the DOL said in the 22-page update.
“[B]ack-end awards commonly result in large amounts of income to the adviser that are paid on an ‘all or nothing’ basis, contingent on the adviser’s satisfaction of revenue or asset targets,” the DOL wrote. “Such disproportional amounts of compensation significantly increase conflicts of interest for advisers making recommendations to investors, particularly as the adviser approaches the target.”
The interpretation will dramatically change recruiting packages going forward, and could lead some firms to try to restructure existing deals, said Rogge Dunn, an employment lawyer with Clouse Dunn in Dallas.
“The old school model won’t work,” he wrote in an email. “There will be more scrutiny of [an] FA’s book, as future bonuses can’t be tied to production metrics.”
Deferred contingent bonuses already in place will be permitted under grandfathering provisions once the rule becomes effective on April 10, 2017, but firms will have to subject brokers receiving them to higher levels of scrutiny.
“To the extent the financial institution chooses to honor these pre-existing arrangements, however, it must adopt special policies and procedures specifically aimed at the conflicts of interest introduced by the arrangements and designed to protect investors from harm,” the FAQ says. “These policies and procedures should establish an especially strict system of supervision and monitoring of conflicts of interest, particularly as the adviser approaches sales targets.”
The payments will be subject to the conflict-of-interest rule’s Best Interest Contract Exemption, which permits customers to sue brokers who put their own interests ahead of their customers.
In another key interpretation, the Labor Department said brokerage firms can continue to compensate brokers with variable payouts based on production, but only if such variable grid structures “are not intended or reasonably expected to cause advisers to make recommendations that are not in the best interest of retirement investors and…do not cause advisers to violate the reasonable compensation standard.”
Brokerage firms “must take special care in developing and monitoring compensation systems to ensure that they do not run counter to the fundamental obligation to provide advice that is in the customer’s best interest,” the DOL said.
As an example of conflict-tainted grid payouts, the DOL said that firms cannot give payouts for selling mutual funds that pay firms more for distribution than others.
”If, for example, different mutual fund complexes pay different commission rates to the firm, the grid cannot pass along this conflict of interest to advisers by paying the adviser more for the higher commission funds and less for the lower commission funds (e.g., by giving the adviser a set percentage of the commission generated for the firm),” the DOL said.
Good
Precisely why I did make a move a year ago. My proposed compensation package was heavily weighted at the back end, and not meeting the lofty goals would have meant inconvenience for clients and me with no reward.
I’ve been telling people this is coming all year, glad I moved when I did. Given large advisor transition volume that normally happens this time of year, I’m guessing there are a few thousand Advisors out there in some stage of the process who are in for a shock when they realize their offer just got pulled.
If your doing what is right for the customer none of this matters, put the customer first
Then no broker would ever move between the big firms. They are all basically the same. Furthermore just buy blue chip stocks or the S&P index and lose the clients phone number they will be better off.
I could not agree more…the problem is,perhaps, the definition of what is in the clients “best interest” at a specific point in time with a specific set of parameters could now put some one in jail even though they followed all the rules and regs with the best of intentions…..we will see.
It’s about only the politicians making money. Asset bonuses on no way affect a client, additionally, you don’t see limits anywhere else when a business is sold. Can you imagine limiting the sale price for a Chili’s franchise or the structure of it. Most companies have sales based on revenue goals, but not in the new communist America. Some animals are more equal than others.
This big reduction in recruiting incentive is yet one more reason even more advisors will leave the wirehouse world and go independent.
Predictions moving forward:
1. Firms will use some of the money saved by not paying back-end bonuses on retention bonuses instead.
2. One of more of the big wirehouses, and perhaps a couple of the larger regional firms, will move to acquire an independent broker/dealer.
3. Becoming independent just became a LOT more attractive to a LOT of advisors.
4. Pay-out grids will be adjusted upward for a limited number of years to offset the elimination of back-end bonuses.
5. Front-end bonuses will decrease, not increase, over the next few years as firms use this ruling to simultaneously chip away at that hated expense.
You heard it here first.
In other news… new regulations are out today that limit conflicts of interest within DOL rules by clawing back federal pensions from DOL employees whenever an illogical rule is implemented, and and the DOL pension fund must repay all the attorney fees for individuals and firms found not at fault after the dept takes actions.