Securities Brokers to Disclose Financial Incentives for Switching Firms

For years, brokers with sizeable books of business (large and well-funded client bases) often moved between firms in order to receive robust up-front bonuses. The bonuses often measure between $750,000 and $1 million. The bonuses are generally paid to brokers in the form of “forgivable loans” – for each year that the broker is employed by the new firm a portion of the bonus is forgiven (the entire amount is generally extinguished after five years). Clients are generally told that the broker’s move was spurred by a desire to improve client account services or to obtain better research. Until now the clients have never been told the truth behind the move, or for that matter, been informed at all regarding their bottom-line value to the broker. That may be changing. On April 15, 2013, the Wall Street Journal reported that securities regulators are widely expected to start forcing stockbrokers to disclose to clients when they receive big dollars in connectio with a move to a new firm. The disclosure may cause clients to be more circumspect about moves that are touted as being made for the client’s benefit. My own experience in handling securities matters is that at least 90% of clients follow departing brokers to their new firms. Perhaps now, clients will begin to question the logic of such. Also, the circumstances may spur a discussion between the client and broker about the fees and costs being paid by the client. A large client who is informed that the broker is being paid handsomely simply because the client has hitched his wheel to the broker may extract greater price concessions for following the broker to the new firm, or conversely, with the current firm for staying put.

Author: Mark Krudys, a former SEC Enforcement Division attorney and securities federal prosecutor who regularly represents clients in disputes with brokerage firms.