“And even if you do provide that level of disclosure to your clients–and let’s face it, very few do–there are a host of practical issues that will likely emerge in due course,” he continued. “If anything comes up once the advisor’s transition has been completed that a client feels created a negative outcome, and in response, the client chooses to initiate or become part of a legal action against the advisor, there is a clear 'guilty until proven innocent' position that the advisor is immediately pushed into.”
This is where aspersions can be cast on a rep’s motivations. “Without question, one of the most frequent areas where such legal actions arise is in the areas of fees and expenses,” Sandler maintained. “Are there differences in the new firm’s investment product platform costs? Higher ticket charges? Increases in annual maintenance fees? Even a very slight increase in any of two to three dozen kinds of fees and costs for the end client could easily trigger a dispute, and these are the kinds of disputes that can impair or sometimes even end an advisor’s career. Under these circumstances, it’s exceptionally difficult to argue against accusations that you acted against your client’s best interests when you knowingly chose to accept a substantially higher than average, up-front transition check from your new IBD.”
At various junctures over the last few decades, regulators have questioned the integrity of the recruiting process in the brokerage industry and suggested that brokers be required to disclose any payments, loans or other inducements to clients when they switch firms. But the issue has always fallen by the wayside.
Sandler’s perspective is certainly outside the mainstream and probably would bother third-party recruiters as much as IBD executives and reps themselves. Several sources acknowledged that there were problems that often arise when switching B-Ds simply for upfront money, but they challenged the idea that these problems could be “career ending.” Others said that LPL is as sophisticated as any IBD and would not cross the line in recruiting if the strategy created potential liabilities.
There are, of course, other downsides to the forgivable loan game. Paramount among them is the message it sends to an IBD’s existing rep network about senior management's priorities. Specifically, when existing reps at a B-D see the firm spending huge resources on outside people and not loyal reps who have been at the firm for decades it is easy to conclude the firm is taking longtime reps for granted.