SEC proposal looks to balance brokerage model with concerns over hidden incentives
Brokers won their fight against the controversial fiduciary rule. Now, a battle is brewing over a new proposal by securities regulators that would require them to cut back on sales incentives tied to customer advice.
The battle with the Securities and Exchange Commission will play out in 2019. Major brokerages including Morgan Stanley, Bank of America’s Merrill Lynch and Fidelity Investments are pressing the SEC to let them maintain current broker pay practices, arguing the plan could limit the products and services they provide.
SEC Chairman Jay Clayton, meanwhile, is staking his legacy on changes that would require more broker disclosures and limit sales incentives.
The proposal says that brokers should avoid “compensation incentives for employees to favor one type of product over another” and suggests pay for brokers be based on “neutral factors” such as the amount of time and complexity of the work involved. Brokers claim such a system could put their business model at risk.
.. The industry is hopeful Mr. Clayton’s statements mean the SEC won’t force brokers to eliminate all forms of variable compensation, but instead boost disclosure of pay arrangements and weed out some extreme practices such as sales contests.
.. Most brokerages pay their employees more for selling certain products over others, depending on how lucrative they are. This practice can result in customers paying more for products and services than they need to, though brokers defend the practice as the only way to reasonably offer a range of investment options. Without assurances their pay practices comply with government regulations, investment firms say they could stop offering certain products to avoid possible legal liability.
.. To advocates of a tougher rule, pay incentives call into question whether a product is being presented to a customer for their benefit or for the broker’s.“Brokerage firms artificially create all sorts of perverse incentives to encourage brokers to make certain recommendations that are very profitable for the firm and the broker, even if they aren’t really good for the customer,” said Sen. Elizabeth Warren (D., Mass.) at the December hearing.