Firms take steps to keep clients as retention deals for advisers expire
By Michael Wursthorn
Published on Jan 7, 2016 on The Wall Street Journal
Big brokerages are wrestling with a threat to their client assets: their own brokers.
Thousands of stockbrokers will turn free agent this year as their long-running retention deals expire. That is prompting the big brokerage firms, most of which are owned by banks, to take steps to stymie their departures and keep clients from moving with them if they do go.
Recruiters say brokers typically take 80% of their clients with them when they change firms. As brokerages brace for a wave of adviser departures, firms including Bank of America Corp. unit Merrill Lynch and Morgan Stanley have changed their policies to declare some clients property of the firm and off-limits when brokers depart.
The firms are also applying greater scrutiny to departing brokers’ client lists and the steps they take to persuade clients to join them when they leave, turning departures into extensive negotiations involving attorneys and debates about which accounts are fair game, some brokers and their business advisers say.
The retention deals date back to the financial crisis, when banks handed out incentives to get brokers to stick around as giant mergers reshaped the industry. They are expiring at a time when big banks are relying on the steady income produced by their armies of wealth managers—and when many successful advisers are choosing to leave big brokerages to launch their own firms.
On average, financial advisers at the four biggest U.S. brokerages—Merrill, Morgan Stanley and the securities units of UBS Group AG and Wells Fargo & Co.—manage $122 million in assets and generate just over $1 million annually in fees and commissions. Top producers generate far more.
“The brokerages will do anything and everything they can to make your move as difficult as possible—not to get you back, but to scare the next wave of people leaving [the major brokerages],” said Steven Dudash, a former Merrill Lynch broker who left in 2014 and now operates his own firm, IHT Wealth Management in Chicago.
Mr. Dudash said Merrill slowed the account-transfer process for a number of his clients by not taking his calls to complete the moves. “They’d say someone isn’t there,” Mr. Dudash said, “then forward all the calls to management, and then management wouldn’t take the call.”
Mr. Dudash retained those accounts but he said the delays bogged the process down, giving other Merrill advisers a chance to pitch his clients.
A spokeswoman for Merrill declined to comment on Mr. Dudash’s allegations.
Clients can always follow their advisers if they wish. The debate is over how actively brokers can try to recruit them to come along.
The new restrictions are chipping away at procedures agreed to under the Protocol for Broker Recruiting—a decade-old truce that brought relative peace among more than 1,200 securities firms including Merrill, Morgan Stanley, Wells Fargo and UBS.
The 2004 accord has helped limit the number of lawsuits and arbitration claims filed over broker moves by outlining an orderly system for brokers to change jobs. The protocol says advisers can take names, addresses, phone numbers and email addresses for “clients that they serviced while at the firm.”
These days, though, firms are putting clients inherited when other advisers retired or left a firm off limits to departing brokers.
Each of the four big brokerages has introduced a program that allows a retiring adviser to hand clients over to a colleague in exchange for a cut of the revenue for as long as three years. The adviser who inherited the clients could be sued if he or she were to try to take them along to a new firm within a predetermined period.
Merrill also has been telling its more than 14,000 brokers that they can’t reach out to clients who were referred to them by Bank of America’s branches, brokers and lawyers say.
Merrill views those referrals as being the bank’s property, people familiar with the policy said. Advisers can opt out of receiving those referrals, they said.
“There are some advisers that will leave behind a vast majority of their clients,” saidBrian Hamburger, managing director of MarketCounsel, an Englewood, N.J.-based firm that counsels brokers who go independent and helps them comply with financial regulations. “The goal here is for the adviser to avoid litigation.”
Many of the experienced advisers who leave do so to launch their own firms. Before the financial crisis, the largest securities firms held about half of all retail client assets, according to research firm Cerulli Associates. At the end of 2014, their share had fallen to 38%, compared with 36% for independent advisers. Cerulli predicts independent advisory firms will edge ahead of the major brokerages as early as this year.
The brokerage industry has changed since Merrill, UBS and Smith Barney became the first firms to sign the broker-recruiting protocol in 2004. Bank of America acquired Merrill; Morgan Stanley bought Smith Barney from Citigroup Inc., and Wells Fargo bought Wachovia Corp.
Most of the acquirers asked brokers to sign retention deals, typically giving them millions of dollars in the form of forgivable loans in exchange for agreements to stay for as long as eight or nine years. The deals Bank of America offered to Merrill brokers will begin expiring this year. Morgan Stanley’s retention packages offered to Smith Barney brokers will start to expire mostly in 2019. If brokers leave before then, some of that money must be immediately repaid to the employer.
As these deals expire, some express little surprise at the measures firms are taking.
“It has to go this way, because the firms are dealing with assets that are walking out the door,” said Thomas B. Lewis, an attorney with Stevens & Lee who represents brokers who leave the major firms. “It’s going to get harder for advisers to leave.”