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Beware of the Traps of Up-front Money

May 30, 2017

While getting up-front money from your new broker-dealer is always exciting, remember that your broker-dealer is giving you that money to keep you around for the life of the repayment schedule.  As commonly structured, up-front money will be evidenced by a promissory note which will be forgiven over the period of the note—usually five to ten years.  If you leave before the end of the term, the full amount of the note will be due and payable.  Each year, as the note is forgiven, you will be assessed with income for the amount forgiven and will owe income tax on that amount.

If you are lucky enough to be given up-front money, have an attorney review the terms and conditions of the up-front money.  Sometimes, broker-dealers will tie non-competition/non-solicitation clauses to repayment of the note.  Often the notes come due and payable if you terminate for any reason, whether voluntary or involuntary.  You should understand all of the obligations that come along with that check before you agree to be bound by them.

If you get up-front money, consider depositing it into a separate account and accessing the funds only as the loan is forgiven.  Doing so will provide you with funds to cover the taxes on the amount forgiven, and it will also leave the balance for you to repay your up-front loan if you decide to switch firms.

If you spent your up-front money and are considering leaving your firm, plan your exit accordingly.  The up-front money from your next firm needs to be sufficient to retire your note with your old firm, or you will have to come up with the difference.  Your firm will not hesitate to bring an arbitration against you for the unpaid balance, and FINRA arbitration awards are due and payable within thirty days or your license can be suspended.

If you have valid claims against your broker-dealer which you believe offset the unpaid note, you can litigate those claims in arbitration.  Give us a call to find out if you have valid claims which might offset your note.

Investment Adviser Representatives:  If you receive up-front money and a forgivable loan from your executing broker-dealer, you may have an obligation to disclose this fact to your customers as a potential conflict of interest.  The SEC has been bringing enforcement actions for failure to disclose these facts.