Forcing Wall Street brokers to disclose bonuses they receive to switch firms is likely to backfire on the industry as workers use the information to seek higher pay, recruiters and former brokers said.
“It’s like knowing the car dealer’s price list,” said Marc Dobin, founder of Jupiter, Florida-based Dobin Law Group PA, who represents brokers, brokerage firms and investors on employment disputes. “If a broker is looking to leave a wirehouse for a choice of two competitors and has access to this knowledge, it enables the broker to negotiate harder.”
The Financial Industry Regulatory Authority, Wall Street’s self-regulator, is seeking public comment on a plan meant to protect customers by requiring brokers to disclose incentives when changing employers. Conflicts may arise if payments encourage brokers to push products to clients that aren’t needed or suitable. The rules would apply only to bigger brokerages that can afford to pay up-front bonuses for new recruits.
Disclosure “would certainly put brokers in the driver’s seat when it came to negotiations,” said Mark Scheffler, senior portfolio manager and founder of Wisconsin-based Appleton Group Wealth Management LLC, which oversees about $138 million.
Brokerages typically recruit financial advisers with “forgivable” loans -- a kind of bonus that must be repaid if the employee leaves the firm before a specified time. The largest companies can lure star brokers from competitors by promising up-front payments of as much as seven figures, Dobin said.
“There’s no question there will be leverage” for brokers to demand higher pay if Finra approves the plan, said David Glazer, president of New York-based ECG Resources Inc., which recruits brokers with clients who have at least $25 million to invest. “Every firm right now is looking to cut fees and lessen the movement of brokers.”
Finra is reviewing conflicts at 14 of the largest U.S. brokerages, focusing on compensation and recruiting, the regulator said in July, without naming the firms. Its board of governors voted last week to begin the public comment period, which typically lasts one to two months. The plan would need approval from the U.S. Securities and Exchange Commission.
Nancy Condon, a Finra spokeswoman in Washington, said she couldn’t comment on whether the board of governors contemplated how the plan might influence compensation discussions before it sought comment.
“The focus of this proposal is investor protection,” Condon said in an e-mailed statement. “It is important to make sure that investors have all relevant information when they are considering a move to a new firm.”
Liz Pierce, a spokeswoman for the Securities Industry and Financial Markets Association, said it’s too early to comment on the proposal. The trade group represents some of the biggest U.S. brokerage firms including Goldman Sachs Group Inc. (GS) and Morgan Stanley.
A typical broker may change firms five or more times over the course of 25 years, said Robert Moore, president and founder of Lafayette, Colorado-based Institutional Capital Management Inc.
Each move offers a chance to push for a sign-on bonus -- a negotiation that could advantage a broker familiar with what others were paid, said Mark Albers, who managed brokers at Morgan Stanley (MS) and Merrill Lynch & Co. and now runs Albers & Associates Consulting LLC, a Redondo Beach, California-based career-counseling service for financial advisers.
The National Hockey League’s current labor dispute between players and team owners, which has forced the cancellation of more than a third of the season, is an apt analogy for Finra to consider, Albers said.
“The owners don’t want salaries to get out of hand, however, they are the very same people who have bid up the salaries for free agents since the last contract was put into place,” he said. “When an owner really wants a player, he has to outbid his rival. So how do you do that and keep salaries in check while still building the winning team?”
What peers earn “certainly plays a role” when the National Football League and National Basketball Association players he represents negotiate salaries, said Mark Bartelstein, a former Morgan Stanley investment banker who’s now chief executive officer of Priority Sports and Entertainment, a sports-management firm with offices in Chicago and Los Angeles.
“People always want to feel like they’re being compensated relative to people they compete with,” Bartelstein said in a telephone interview. “The players’ associations share information about compensation packages among all players so they can create competition.”
Disclosures could also be used against brokers by their former firms, according to Shepherd Tate, a partner with Nashville, Tennessee-based law firm Bass, Berry & Sims Plc.
Some brokerages “may actively use the details of the broker’s transition package to lobby customers not to leave the firm,” said Tate, who leads the firm’s broker-dealer and financial products litigation group.
Some clients may be wary of staying with brokers who earn high bonuses, said Brad Stratton, a former Merrill Lynch manager and now first vice president at San Jose, California-based Concert Wealth Management Inc.
“When I moved, I know clients who went and looked online to see if I had any infractions on my record,” Stratton said. “If they’re checking that, they’re probably going to look at these bonuses.”
The amount firms pay for sign-on bonuses quickly becomes common knowledge on Wall Street, said Jordan Schultz, executive vice president at White Plains, New York-based Leitner Sarch Consultants Ltd. Finra’s plan is unlikely to give brokers an added negotiating edge, he said.
“Most guys know already what the other guy’s getting, so it’s not like it’s a trade secret,” Schultz said.
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