In her first year as chairman of the Securities and Exchange Commission, Mary Schapiro wrote a letter to the chief executives of broker-dealers warning them about the potential pitfalls of recruiting brokers with high upfront bonuses.
"Recent press articles have reported that some broker-dealer firms may be engaging in a vigorous recruiting program for broker-dealer registered representatives," Schapiro's letter began.
"Reports suggest some firms are offering substantial inducements to potential registered representatives, including large upfront bonuses and enhanced commissions for sales of investment products," the August 2009 letter continued.
Schapiro's stated concern was that brokers may feel obliged to churn customer accounts or recommend unsuitable products to justify the upfront money.
A year later, at SIFMA's 2010 annual conference, Schapiro reiterated her concerns about incentive compensation, telling a Dow Jones reporter that the large bonuses used to lure brokers from one firm to another "may not be in the best interest of retail investors."
No Moves to Regulate Upfront Bonuses
Yet, despite the calls for vigilance, there have been no moves to actually regulate or force disclosure of upfront or retention bonuses, which remain as much a fact of life in the wirehouse world today as ever; indeed, a Reuters story points out that the recruitment arms race has only escalated, with bonuses in the millions of dollars for top teams.
While Dodd-Frank regulates compensation for high-level executives, advisor bonuses are unaffected and the SEC is not currently engaged in rulemaking that would put teeth in Schapiro's jawboning about changing broker-dealer incentive compensation.
So who wants to change the status quo in broker compensation? Securities lawyer Patrick Burns (left) does. Or at least he is willing to say so publicly, though he believes the wirehouses themselves would like to end the arms race in broker bonuses, but are afraid to make the first move lest their competitors recruit away their top teams.
The Beverly Hills, Calif.-based attorney is not worried so much about the wirehouse firms' P&L statements as he is about his own registered investment advisor clientele.
"Our clients who are investment advisors would like to see the playing field leveled in terms of disclosures," Burns said in an interview with AdvisorOne.
The securities attorney says his RIA clients must disclose all forms of direct and indirect compensation and conflicts of interest, including soft dollars and any additional benefits that an advisor gets for using a certain custodial platform.
"If an advisor had additional benefits or services from a third-party money management firm, all that would have to be disclosed to clients," Burns says.
"If [registered investment] advisors have that level of obligation, shouldn't brokers have an obligation to disclose these bonuses?" Burns asks.
Not in the least, says veteran recruiter Mark Elzweig (right).
"Soft-dollar trading costs are part and parcel of what investors pay for trades," the New York-based principal of Mark Ezweig Co. told AdvisorOne. "This kind of disclosure is simply an a-la-carte breakdown of costs for investors to which they are entitled. These trading costs came directly from investor monies."
But to Burns, the fact of higher costs at large brokerage firms should itself attract regulatory scrutiny.
"The trade costs are certainly a lot higher at the big brokerage firms because they've got to pay these large bonuses," Burns says. "So ultimately it's kind of a round trip from the client's point of view. They have to pay higher fees."
'There's No Mystery About Wirehouse Cost Structures'
