The New Golden Rule for Advisors on the Move
What advisors need to know about the “Broker Disclosure Rule”
As of November 11 of this year, the long expected SEC approved FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers) will take effect. This pronouncement will make it mandatory for an advisor who changes firms to explain to his clients the benefits they would experience in transferring their assets to the new firm, as well as the possible negatives, including “direct costs that might be incurred”.
The educational communication to the client must also clarify other implications of the advisor’s move, such as:
- Whether financial incentives the advisor received might create a conflict of interest.
- That some assets may not be directly transferrable to the new firm and that the client could incur costs due to liquidation, price differences, and/or account maintenance.
- The differences in products and services between the current firm and the new one.
What might this mean for advisors?
The rule should be a non-issue for those advisors who have established trust and longstanding, deep relationships with their clients. That trust creates a bond that an “educational communication” will have little effect upon, as those clients know that their advisor acts in their best interest.
What do advisors who are planning a move need to do?
If not positioned and explained properly to clients, there is a possibility that the educational communication could raise a number of unintended questions or suspicion about the reasons for the move and its potential impact on the clients. It is why we believe it is imperative that an advisor who is considering a change of firms after mid-November do the following:
Take the time to educate himself now about the rule, its wording and requirements, and prepare a script of sorts, that he can use to make sure that the move is explained as something being made for the clients’ benefit and in their best interest (assuming that is the case). Seek advice from the new firm on talking points about why this firm is a better place to serve clients; that is, to answer the all-important “What’s In It For Them?”
And, advisors need to be particularly self-aware about the relationship they have with their clients—such as performance history, level of trust, and length of relationship. These are often indicators of how receptive clients will be to the move and the communications they receive.
Ultimately, our position on this rule is simple…
This rule should not cause advisors to feel pressured to get ahead of it by accelerating a move, especially if those advisors have not completed their due diligence or made 100% certain that a move is in fact the best course of action—for clients, the business, or the advisor.
However, if you are making a move – and honest with yourself that you are doing so for the right reasons and have strong relationships with your clients – then this disclosure rule is likely to have little impact.