Monthly archive

November 2016

Back to the Future


The DOL has spoken! And yet, we are hearing so many different interpretations of what they said.

Some firms read the FAQs in an entirely different way from other firms. Some firms are still in the ‘wait and see’ category, and some are forging ahead with slightly modified, but not materially different, recruiting deals.

How will it all shake out, six months from now? I think I know.

I can see the future, because we have been here before. April 10, 1995 to be exact. I remember it like it was yesterday.

Google the “Report of the Committee on Compensation Practices”, aka “The Tulley Report”. (Warren Buffett was one of the five committee members, with Merrill Chairman Daniel Tulley acting as Chairman of the committee)

I just came back from reading all 22 pages. The integrity of the report stands the test of time, two decades later, even if many of the participating firms did not.

The main issue of the day was no different from the main issue of today. The Tulley report used the term “best practices”, and the DOL uses the term “best interests”. They mean the same thing: don’t take advantage of your client!

The Tulley Commission examined and opined on things like branch manager compensation conflicts, and sales contests, and accelerated payouts, and product transparency. On page 2 of the report, innocently buried amongst 8 bullet points, is the one sentence that everyone seemed to cling to as the “Did you hear??” item: “Eliminating up-front bonuses (or paying them over several years) to encourage longer tenure by RR’s”.

Recruiters and recruits gasped when they heard those words: “eliminating up-front bonuses”. What?? That would be un-American! Can they do that?

Sound familiar? You can substitute the words “financial institutions generally may not enter into such arrangements under the full BIC Exemption”, except the DOL is referring to back-end incentives (they had the mercy and good judgement to leave up-front bonuses alone). We will all remember where we were when the 10/27/16 DOL FAQs document ricocheted around the WM industry faster than a Donald Trump tweet. The resulting “Did you hear?” moment went like this: “Did you hear Morgan Stanley pulled their deals?”

Some of us are old enough to remember the fallout from the Tulley Commission. We all watched as Merrill attempted to discontinue upfront recruiting bonuses and lead by example. The problem? Prudential could not afford to follow Merrill’s lead, and the detente ended before the ink was dry on the unwritten recruiting rules.

We are going to see all sorts of draconian recruiting policies get announced, and unannounced. If Morgan Stanley stands firm at 150% upfront, and no back-ends, they won’t be able to compete with firms that are offering 150% upfront PLUS back-ends. That is economic physics. “People are saying” that perhaps the MS lawyers read the DOL FAQs in a way that suited their recruiting sensibilities. Clearly they are trying to lead the industry by example. So far nobody has followed.

I am entirely confident that logic and free markets and capitalism will prevail. And, just like the Tulley Commission served to change the industry for the better in profound and legitimate ways, the DOL document will do the same. It already has, by inspiring firms to segregate retirement assets from back-end asset incentives, and dropping revenue-based incentives.

Recruiting is being re-engineered as we speak, but a $5million team is in no less demand today than it was on 10/26. And we all know the relationship supply/demand has on price. That is economic physics.

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