Morgan Stanley’s decision to cut back-end deals signaled the initial fallout from the Department of Labor's fiduciary rule FAQ document, which provides advisers guidance on how to interpret the impending regulation.
Morgan's decision was triggered by the response to question 12 of the FAQ, which states that “such back-end awards can create acute conflicts of interest that are inconsistent with the full (best interest contract) exemptions’s requirement . . . and that “firms must structure recruitment and other incentives carefully to avoid violation of these standards or evasion of the exemption’s requirement.” The implications for the recruitment of advisers could be substantial. Other firms could follow Morgan's lead and decide also to cut back-end deals.
Recruiters have long expected that the uber-rich recruiting deals of recent years wouldn't last forever. Implementation of the fiduciary rule may finally bring that end.
With the rule not going into effect until April 2017, advisers already in transition to a new job clearly should make the move prior to the regulation's implementation. That way, their new employer can honor the grandfathered deal “provided that it engages in stringent oversight of the adviser during the period of the arrangement,” according to the response to question 12.
This may turn into a coups for recruiters if the impending regulation gets advisers considering new jobs to act before the recruiting and commissions change.
Long-time recruiter Howard Diamond of Diamond Consultants offers a suggestion that spares all adviser recruiting deals from the impacts of the regulation.
"Why not bifurcate the deal from the retirement assets? Whereby, an adviser with a strictly fee-based business, and therefore not covered by the DOL rule, will still be incentivized to make a change.” On the flip side, he says, this could be a windfall for the independent space.
One reason advisers hesitate from going independent is the smaller deal. The payout will likely be higher, but the deals for switching firms cannot compete with the much larger offers from the wirehouses. The large up-front with a possible 300% all-in deal is hard to walk away from.
Eliminating the back-end portion of the deal offered by a major wirehouse takes some steam out of this argument. As does concerns for the portion of Q12 that states, "Based on these considerations, if before the date of this guidance, a financial institution entered into such an arrangement as part of a written and binding contract, and the firm determines in good faith that it is contractually bound to continue the arrangement after the applicability date, the financial institution may continue to rely on the full BIC Exemption. . . " This portion of the FAQ indicates that the rule may have look-back strength even prior to its execution; firms are likely in discussion as to what this exactly means and how they might re-evaluate their deals accordingly.
A recruiter who works in the independent space, who did not want to be named in this story to avoid hurting his business, says the response to question 12 worries independent firms because some of them have a “claw back” provision based on production goals. Despite the concern, a greater number of advisers are still likely to give independence more consideration since the playing field will be a little more even.
Thinking back years ago, deals increased to an unheard of 100%, thrilling those advisers who were fortunate to land them. We’ve now gotten used to both front-end and back-end incentives that are nearly triple that amount.
With the year's end just a few weeks away, advisers who still have these offers should grab them while they still can. Even before the rule goes into effect, the deals are likely to change, and they may not be as lucrative as we've come to expect.
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