Broker pay plans and recruitment bonuses will be under a brighter spotlight, thanks to the DOL’s final fiduciary rule.
The rule will require some additional public disclosures of broker pay plans, recruitment and retention bonuses, and revenue-sharing payments.
Under provisions for using the best-interest contract (BIC) exemption (which enables advisors to continue using commission products that would otherwise be considered to pose conflicts of interest), financial firms will have to make public web-based disclosures about brokers’ pay plans, including a “fair description of any payout or compensation grids,” according to the explanation that accompanies the BIC rule.
Disclosing a “broad range of compensation structures” applicable to all advisors at a firm “would not be sufficient if in fact there are material differences among advisor compensation,” the DOL says. (The pay of individual advisors would not be disclosed.)
Firms would also have to disclose recruitment and retention incentives offered to brokers.
“These disclosures need not contain amounts paid to specific individuals, but instead should be a reasonable description of the incentives paid and factors considered by the financial institution,” the rule states.
Other incentives, including both cash and non-cash compensation or awards paid to reps for recommending particular product manufacturers or investments, would have to be made public.
So, too, would more details on revenue-sharing payments from product sponsors.
To make the various disclosures, firms may use dollar amounts, percentages, formulas or “other means reasonably calculated to present a materially accurate description of the arrangements” and the “magnitude” of the conflicts, the rule says.
The DOL hasn’t given specifics on how much detail it wants in web-based disclosures, said ERISA lawyer Fred Reish, a partner at Drinker Biddle & Reath.
But the DOL says the information would have to be specific enough for investors and advisors to analyze and comparison shop, Reish says.
“Different people could argue over what that means, but since the burden of proof will be on the broker-dealer, I assume that most will take conservative positions and disclose in some detail,” he said.