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.

That means firms will have to go beyond what they do now.

Few if any firms currently disclose any specifics about their broker pay plans or particular sales incentives.

“To the extent commissions can still drive behavior,” pay plans should be disclosed, said recruiter Danny Sarch of Leitner Sarch Consultants.

Recruitment and retention deals are also not disclosed. A pending Finra rule will require that clients be given a Finra-produced document encouraging them to ask about financial incentives their broker received for moving to a new firm. But no specifics are required, and the rule does not apply to retention deals.

As it does with revenue-sharing and other similar payments from manufacturers, the DOL wants expanded disclosures.

Most brokerage firms currently disclose the maximum revenue-sharing amounts they receive by product category, but nothing about particular vendors.

The DOL says such broad categorical disclosure “covering all mutual funds, or insurance products, for example, would not be sufficiently detailed” unless the financial institution had the same deals with all providers.

That provision could reveal some major differences that providers pay.

One firm that does disclose details about revenue-sharing deals is Edward Jones. On the low end, American Funds pays Jones 2.5 basis points on fund assets held at the firm, while a number of other providers pay up to 13 basis points.

Jones agreed to make the detailed disclosures as part of a 2004 settlement with the SEC.

Firms will also have to include a statement on their websites about how revenue-sharing arrangements impact advisor compensation and mention benefits provided to product manufacturers from the payments.