FINRA Saves Three-Day Weekend

On July 11, FINRA announced it would postpone a decision requiring brokers to disclose to their clients the amount of their recruiting checks. The decision is a huge relief for Wall Street brokers who have been agonizing whether to move before the ruling.

This decision could cause brokers who are on the fence to leave their firms sooner rather than later since forced disclosure of their sizable recruiting checks won’t be required by FINRA.

Brokers and Holidays

When brokers do move, it’s likely to be on a three-day weekend, such as Labor Day, July 4, Memorial Day or President's Day.

Extended weekends are the jumping off point of choice for breakaway brokers because they provide the least amount of friction in the transition.

On a three-day weekend, the boss is usually gone. So are many of the remaining brokers who will reach out to the departing broker’s clients.  With a skeletal crew, the firm's retention plan will have to wait until people return from the long weekend.  Even a few days makes a difference in getting clients to follow the breakaway advisor.

Why Should We Care?

Recruiting checks are one way, albeit flawed in our view, to monetize the hard work of brokers.  (See our white paper on the topic.) Before recruiting checks, brokers were like baseball players prior to free agency – they were captives of their firms.

           

St. Louis Cardinal legend Curt Flood ushered in economic freedom for baseball players when courts ruled with him that players are not the property of owners and could sell their services to whomever they like for the maximum price.

Recruiting checks, in essence, are the equivalent of free agency.  We believe elite brokers are like Hall-of-Famers – they’re worth the large sums of money they command.

A Mixed Bag

However, there are a number of drawbacks with the checks, and they start with the motivation of the broker. Big checks are often the primary reason many move, but you wouldn’t know it from the altruistic emails sent to clients that say, we’re moving to serve you better.

Really? For that matter, have you ever seen a client email disclosing the broker’s recruiting check?

This lack of transparency reminded me of my friend who received the exact same email from two brokers – at different firms – explaining their reasons for leaving to go to the other broker's firm.

In fact, FINRA believes brokers are leaving for the money. We agree with FINRA that he checks are not in the best interests of clients.

But we also question their value to brokers.  The loan forgiveness at nine years is too long.  The punitive performance incentives mean that many brokers will never receive the full amount advertised.  What’s more, it distracts from the bigger prize: Brokers can often make more money and serve their clients better by starting their own firm.

Elite brokers deserve to be well compensated, but we think recruiting checks have serious drawbacks for everyone.   The FINRA rule, if implemented, might actually force brokers to not leave for the recruiting check. A positive in our opinion for brokers and their clients.

Sometimes we need to be forced to eat our vegetables.