The brokerage practice of offering hefty bonuses in the form of forgivable loans is getting scaled back under the weight of the Dept of Labor’s new Fiduciary Rule.  One by one, the 4 major U.S. firms - Morgan Stanley, Merrill Lynch, UBS Group and Wells Fargo Advisors – are announcing plans to scale back the recruitment loans they offer to attract rival brokers – in an effort to comply with new retirement regulations.

Morgan Stanley executives, in a conference call with managers Thursday, said the firm will immediately pull the incentive-laden back-end portions of recruitment packages it offers brokers.  Bank of America’s Merrill Lynch wealth-management unit is weighing a similar move, although no decision has been reached.

SLASHING TOTAL VALUE OF SUCH DEALS.   The deals, which can range up to millions of dollars for top-producing brokers, typically pay 3 times the annual revenue a broker generates off fees and commissions.  Up to 150% is paid out initially when the broker is hired, while the rest has to be earned after hitting certain asset and revenue targets over the life of the deal.  It’s that back-end portion is problematic under the Fiduciary Rule, which aims to eliminate incentives that might cause brokers to give conflicted advice and ensure the interests of retirement savers are put first.

“Such back-end awards can create acute conflicts of interest that are inconsistent” with the rule, the Labor Department said in new guidance to financial firms on Thursday. The guidance further states firms may not use bonuses or other incentives that are “intended or would reasonably be expected to cause advisers to make recommendations that are not in the best interest of the retirement investor.”

One bit of good news:  existing arrangements are grandfathered under the new rules.