Reuters: Regulatory News: Broken broker promises can trigger financial ruin

Reuters: Regulatory News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

Broken broker promises can trigger financial ruin Jul 3rd 2012, 14:12 By Ashley Lau and Suzanne Barlyn NEW YORK, July 3 | Tue Jul 3, 2012 10:12am EDT NEW YORK, July 3 (Reuters) - Todd Vitale was happy at UBS , where he had worked as a broker for more than 20 years building his book of business. He only agreed to move to Morgan Stanley in 2008 after numerous meetings and promises that he would be promoted to management and his business partner would inherit his client accounts. Instead, the partners' incomes plummeted when none of those promises came true. After losing potentially millions of dollars, they took their case to arbitrators at the Financial Industry Regulatory Authority, Wall Street's self-regulator. Last month, the panel ordered Morgan Stanley Smith Barney to pay the California-based advisers nearly $5 million for the broken promises. The financial firm said the "decision is wrong" and it is deciding whether to appeal the award. The case is among a recent spate of claims filed against Morgan Stanley and other firms in the brokerage industry. Although there is no official tally, interviews with dozens of industry lawyers, branch managers and advisers indicate that overpromising is a staple of recruiting practices at some brokerages. Representatives from the brokerages named in this story declined to comment or did not return requests for comment about the issue of overpromising. For advisers, these unmet expectations can be financially disastrous. A PERSISTENT PROBLEM Broken promises to brokers "happen all the time," said Brian Buckstein, an employment lawyer in Wellington, Florida. Beyond the boilerplate contracts handed out by a firm - which usually detail only a broker's signing bonus - offers to switch firms are usually made verbally, making agreements difficult to prove later. "During the recruiting effort, managers try to cast the best light possible on the company," said New Jersey-based lawyer Tom Lewis, who works with brokers moving to new firms. A smart strategy for advisers is to get everything in writing, said former Morgan Stanley manager Mark Albers, who worked at the firm for more than a decade in California. Albers, who now runs a financial services consulting firm in Los Angeles, encourages advisers to get a written agreement that is signed by the manager, even if it is not part of the official contract. Managers say they may oversee hundreds of people and recruit dozens of advisers at the same time, and might not remember what they promised to each person. While a recruit might be promised promotions, key accounts or marketing budgets, the two most common "soft promises" made by managers are office location and support staffing, said former Merrill Lynch manager Brad Stratton. Stratton spent two decades at the firm, now owned by Bank of America, before leaving in February to open up his own practice in Overland Park, Kansas. In a FINRA arbitration case Buckstein is handling against Morgan Keegan, a broker from Caracas, Venezuela, was recruited by the firm to head a new branch in Florida, Buckstein said. The broker later accused Morgan Keegan of ruining his business because the branch opened months late, and he wasn't able to move former clients quickly from his former employer. A spokesman for Morgan Keegan, now a unit of Raymond James Financial Inc, did not respond to requests for comment. LOW-ASSET BROKERS HIT HARDEST Advisers who have smaller amounts of assets under management are the most vulnerable because they do not have leverage to get promises written into contracts. When those promises fall through, advisers often live off their signing bonuses if they can't build client assets fast enough. Todd Smith of Albuquerque, New Mexico, said that happened to him during the three years after he became a Morgan Stanley adviser. Smith was generating annual revenues of about $330,000 when he joined Morgan Stanley. He expected a senior broker from his old firm to move with him and become his partner. A Morgan Stanley recruiter assured Smith that it could legally force the other broker to join him as a partner. That was crucial to Smith, who expected to eventually take on the partner's business. When the senior broker backed out, the recruiter denied the promise. Smith not only earned less, he had higher-than-expected expenses because he was paying an assistant for the partnership, as the firm suggested. That, combined with the financial crisis, eventually led to a 30 percent decline in his revenues. Smith lived off his $240,000 signing bonus from Morgan Stanley - technically a loan that is forgiven in increments over time. He left after three years, before the loan was fully forgiven. Smith, now an adviser with LPL Financial, eventually filed for bankruptcy because he couldn't repay the roughly $200,000 balance he owed. PRESSURE FROM THE TOP Unrealistic promises are often the result of the pressure on branch managers to bring in new recruits "at all costs," said Albers. Albers said he has been in recruiting meetings with senior managers who "promised things I knew the firm wouldn't be able to provide." Such empty promises included perks like office space, negotiated salaries for assistants, and other benefits. But none of that matters unless brokers get it in writing, said Buckstein, the lawyer in Florida. "If you don't, good luck," he said. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions