The U.S. Department of Labor will ban retroactive payout grids and back-end recruitment bonuses, according to interpretive guidance released by the department on Thursday. The changes are associated with the DOL’s new fiduciary rule for retirement accounts.
Notably, the DOL’s guidance, under the heading “Conflict of Interest Exemptions FAQs,” said that back-end recruitment incentives would be forbidden as of the date of the notice, or October 27.
“So with two hours notice, you have to stop all recruitment deals,” said Howard Diamond, general counsel at Diamond Consultants, a recruiting firm. “I’m aghast, dumbfounded” at the DOL’s action, he said.
People had expected any changes to take effect next April when the rule goes into effect, Diamond said.
The FAQs caused Morgan Stanley to pull its deals yesterday, Diamond added.
Morgan Stanley spokesman James Wiggins declined comment.
Existing recruitment deals with back-end incentives for bringing on clients and assets are grandfathered under the guidance, but the DOL said firms must establish an “especially strict system of supervision and monitoring of conflicts of interest, particularly as the adviser approaches sales targets” in a back-end arrangement.
The guidance also put the nix on retroactive payout schedules that most traditional firms use, whereby advisors earn a higher payout rate on past production once they reach a higher threshold.
A new, higher rate “should apply only to new investments made once the threshold is reached,” the DOL said. “Retroactive application of an increased rate of pay for past investments … is likely to create acute conflicts of interest.”
Spokespersons for Wells Fargo Advisors and Raymond James said the firms were still analyzing the guidance and had no comment. A spokesperson for Merrill Lynch declined comment. A representative for UBS was not immediately available for comment Friday.