The “fiduciary rule,” which the US Department of Labor announced this week will go into effect on June 9 as scheduled, will require financial advisors to act in their clients’ best interests when advising them about retirement—or in other words, it will forbid them from steering clients toward products that would maximize the advisor’s own commission or fee. Financial firms and business groups like the US Chamber of Commerce oppose the rule, which they say will hurt growth, lead to a deluge of frivolous lawsuits, and limit the options of employee investors.
Another reason financial institutions may dislike the impending rule, Bloomberg’s Hugh Son explains, is that it is forcing them to change their recruiting practices. Morgan Stanley, Merrill Lynch, and UBS have all said they are cutting back on the use of signing bonuses based on the revenue brokers generated in their previous jobs, which the government had warned them might go against the rule:
Last year, the Department of Labor briefed banks that the industry’s typical signing bonuses could run afoul of the agency’s incoming fiduciary rule. Upon joining a new firm, star brokers were often granted awards of more than three times the revenue they generated in the past year, with the bonus structured as a loan that’s forgiven as the employee stayed with the company and hit targets.
The briefing prodded firms including Morgan Stanley and Merrill Lynch to restructure their enticements, and now brokerages are moving to make more permanent changes.
These changes entail refocusing their talent strategies on retaining their current high performers rather than attempting to poach stars from other banks. According to the Labor Department, the sales targets included in the sector’s customary hiring incentives could violate the fiduciary rule by compelling brokers to push more expensive products on clients.
On the other hand, Son points out, many brokerages have long considered these recruitment deals “a zero-sum game that hurt the industry’s profitability,” so by forcing this change, the rule could conceivably push this sector toward more effective talent attraction and retention strategies. Given the impact they expect the new regulation to have on their growth, however, that’s probably cold comfort.