Should You Tell Clients About That Bonus?

“What have I done?”

That question haunted me after I moved from my old shop, a wirehouse, to the greener pastures of a new, fee-only advisory firm.

I’d wake up in the middle of the night and handicap which clients would follow my team.

The battle for assets was a war, every relationship a firefight. We were outnumbered, the five of us against overwhelming enemy forces. Our former colleagues were ruthless, driven by the intoxicating smell of money and, in some cases, the burning desire to settle old feuds.

They had us surrounded.

I assured clients that my team had moved to a “less-conflicted environment” where, free from the distractions of competing profit silos, we could better serve their interests.

True. But there are conflicts of interest in every organization. So let’s not hear any whooping from fee-only advisers, who beat their chests and sometimes forget that a pricing schedule isn’t the same thing as integrity.

Back to the war. When the flak is flying, when you’re extolling the virtues of the new shop, when you’re reminding clients about your years of good work-should you tack on something about how much you got paid to move?

“I’m a shareholder at my new firm,” I told mine. “No upfront money.” That was it, end of discussion.
Clients were concerned about their wealth. Thankfully, mine was irrelevant. Their reactions to my team’s move fell into three general categories:

Shock: “Who’s watching my money while I decide whether or not to follow you?”

Thoughtful: “Why is your new firm better for me? And what’s wrong with the place where I invested my money all these years?”

Opportunistic: “Think it’s time to take a fresh look at your fees?”

I got stock, no cash. But what if, instead of equity, you get a juicy, seven-figure signing bonus to jump ship?

Should you reveal the number to your clients? Should you explain your Employee Forgivable Loan, or EFL, how you’ve pledged your undying love and affection to the new mothership for, say, the next eight years?

Wall Street’s self-regulator says, “Yes.” The Financial Industry Regulatory Authority is floating a proposal that would force firms to mail a list of due-diligence questions to the clients of each newly hired adviser. The proposed line of questioning:

Were you paid to jump ship?

Did you receive any performance incentives that could influence your investment recommendations?

I say, “Finra, why don’t you post those questions on BrokerCheck and stop killing trees?”

The proposed letter reminds me of those booklets we robo-mail to investors who open option accounts. You know, those carefully crafted communications that shift legal risk to clients. Is the Finra proposal anything more than another round of caveat emptor disguised as transparency?

To continue reading visit the Wall Street Journal.