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Sep

2014

Financial Crisis Led to PTSD Suffering Advisors

From the Desk of Jim Eccleston at Eccleston Law Offices:

According to a recent study in Health & Social Work, the event of sudden and dramatic personal financial loss can directly result in post-traumatic stress disorder (PTSD). People suffering from PTSD feel as if the traumatic event is still occurring or will reoccur and the psychological distress intensifies at exposure to external cues that resemble any aspect of the traumatic event. And this applies to both clients and financial advisors, when their financial security is undermined.

During financial crisis, the well-being of financial advisors usually faces double threats not only to the security of their careers, but also to their own portfolios. Advisors normally make the same financial decisions and use the same strategies for their own portfolios as well as for their clients’ portfolios, which could suffer double major losses in both portfolios during financial crisis. In addition, calls from frightened, disgruntled and often hostile clients who blamed the advisor add to this stress.

It is common for PTSD sufferers to avoid activities, places or people that arouse recollection of the trauma, so avoiding the office and looking for a career change is a common outcome of PTSD. In addition, the traumatized advisor may avoid contacting clients, anticipating a negative, hostile conversation.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Sep

2014

From the Desk of Jim Eccleston at Eccleston Law Offices:

According to the J.D. Power U.S. Financial Advisor Satisfaction Study, Edward Jones, Raymond James & Associates, and RBC Wealth Management ranked the highest three among advisory firms for advisor satisfaction.

The study considered seven factors for determining advisor satisfaction: professional support; client-facing support; compensation; firm leadership; operational support; problem resolution; and technology support. Among those factors, firm leadership and compensation are the most important drivers in determining advisor satisfaction. Advisors value that their leaders communicate effectively on the strategic vision of the firm and create a culture of accountability. Advisors also are sensitive to a competitive pay package as well as consistent and transparent compensation plans.

However, according to the survey, a third of advisors said that they lack a complete understanding of their compensation plan, and less than half of advisors indicated that the cultural value of the firm and client focus were the primary reasons for them to stay at their current firm.

Moreover, the study also revealed that the brokerage industry shows low adoption of new technology. Less than 30% of surveyed advisors use smartphones or tablets to leverage their businesses.

Aug

2014

Merrill Lynch Advisors Rumored to Leave the Firm in Large Numbers

From the Desk of Jim Eccleston at Eccleston Law Offices:

Merrill Lynch still is struggling with the issue of retaining advisors. In 2007, Merrill Lynch had a total of 16,740 financial advisors. However, today it has a total of 13,276. That equates to a loss of nearly 30% since 2007.

Merrill Lynch advisors prefer to transition to two specific platforms: wire-house rivals and the growing RIA/hybrid models. UBS, HighTower, Steward Partners, Wells Fargo and Raymond James have benefited the most from the Merrill issues.

The expiration of retention bonuses has undoubtedly freed many Merrill Lynch advisors. That said the new firms will present forgivable loans and employment agreements that should be reviewed by competent legal counsel, so that the advisors aren’t “jumping from the frying pan into the fire.”

Aug

2014

Broker Employment Transition Ends in Jury Verdict Finding Fraud: Lessons Learned

From the Desk of Jim Eccleston at Eccleston Law Offices:

What should have been an unremarkable employment transition, from brokerage firm stockbroker to owner of a new investment advisory firm, ended in disaster for Benjamin Lee Grant and his firm, Sage Advisory Group, LLC (“Sage”). A Boston jury recently agreed with the Securities and Exchange Commission (SEC) that the defendants committed fraud in connection with the employment transition. Let’s explore what went wrong.

Benjamin Grant had been a successful broker. Prior to October, 2005, he was a registered representative at Wedbush Morgan Securities (“Wedbush”), with 300 customer accounts and more than $100 million under management. Virtually all of the customers’ assets in turn were managed by First Wilshire Securities Management, Inc. (“First Wilshire”), an investment firm based in California. Grant resigned from Wedbush Morgan Securities in September, 2005 to go into business for himself as Sage.

So far, so good. Brokers do change jobs, and some go into business for themselves by starting their own investment advisory firms. Furthermore, those who leave their firms typically seek to transfer their customer accounts to their next firm.

Not so, the SEC alleged. Starting on or about October 4, 2005, the SEC alleged that Benjamin Grant engaged in a fraudulent scheme to induce his former brokerage customers to transfer their assets to Sage, his new advisory firm. The allegation appears to be based solely upon a letter that Grant sent his customers on October 4, 2005, and upon subsequent communications related to that letter. The material representations of Grant’s letter, according to the SEC, are:

At the suggestion of First Wilshire, customer accounts were being moved from Wedbush to a discount broker and that Sage had been formed to handle their investments.
The charge to customers for their accounts was changing from a 1% management fee paid to First Wilshire (plus Wedbush’s brokerage commissions) to a 2% “wrap fee” paid to Sage.
First Wilshire had indicated that the wrap fee historically had been less expensive than the previous arrangement.
If customers wanted to avoid any disruption in First Wilshire’s management of their assets, they had to sign and return the new advisory and custodial account documents as soon as possible.

Additionally, the complaint alleged that in subsequent conversations with customers, Grant told them that First Wilshire no longer was willing to manage their assets at Wedbush and that they had to transfer to the discount broker and sign up with Sage.

What did the SEC fault? The SEC alleged (and a jury verdict confirmed) that those written and oral statements were materially false and misleading. Why? A few reasons:

First Wilshire had not required a transfer from Wedbush.
First Wilshire had not refused to continue managing the customers’ assets at Wedbush.
First Wilshire had not authorized Grant’s statements.

Moreover, the SEC alleged that Grant’s wrap fee statements were without factual basis. In particular, Grant failed to disclose that, while the switch from Wedbush to the discount broker would result in significant savings, those savings would flow to Grant and Sage rather than to the advisory clients! Grant failed to disclose that, as a result, Grant and Sage’s compensation would be substantially increased. Indeed, once Grant’s customers transferred their accounts from Wedbush to Sage, Grant more than doubled his own compensation!

In short order – after a mere 2 hour jury deliberation – the jury found fraud. Both defendants were found to have violated Sections 204A and 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rules 204A-1 and 206(4)-7 thereunder.

Notably, in 2011, the SEC filed a separate civil injunctive action against Grant’s father, Jack Grant. That civil action alleged that Jack Grant, a lawyer and former stockbroker, had violated a SEC bar from association with investment advisers by associating with his son Benjamin Grant’s investment advisory firm, Sage, and by acting as an investment adviser himself. The Complaint further alleged that Jack Grant, Benjamin Grant and Sage fraudulently failed to disclose Jack Grant’s checkered disciplinary history, including that he had been barred, to Sage’s advisory clients. Jack Grant consented to settle the charges.

This case undoubtedly involved an employment transition that went very badly and which was based upon extreme facts. However, brokers and financial advisers of all stripes need to be careful in planning their employment transitions, with the assistance of competent legal counsel, and in not over-selling the reasons why their customers should follow them to their next firm.

Jul

2014

Top Wirehouse and Regional Broker-Dealers Continue to Grow

According to OnWallStreet’s annual ranking of the top regional and wirehouse broker-dealers, wirehouses and regional broker-dealers continue to grow but face challenges.

Last year, Morgan Stanley topped the industry leaders list with increased commission revenues of 6.4%, and fee revenues of 6.2%.

UBS is in the process of transforming itself into a more comprehensive wealth management firm. It is providing advisors with support and training. And to further boost revenues, UBS is aiming to grow its lending business and mortgage offerings. At the end of 2013, UBS already had expanded mortgage lending to $6.7 billion.

Bank of America Merrill Lynch, which topped the wealth management firms’ list by revenue, is aiming to boost advisor productivity through large-scale technology upgrades. The firm recently launched an iPad app, “Merrill Lynch Clear”, which uses interactive graphics and research to help users identify their retirement priorities. Moreover, the firm also is upgrading and combining its platform into a single advisor workstation, Merrill Lynch One, which is expected to be a vital tool for Merrill advisors.

Regional leaders like Royal Bank of Canada (RBC) rapidly have expanded its force in the U.S. market through a number of acquisitions starting in 2000. The firm reported a roughly 15% profit growth in the second-quarter earnings this year. And according to RBC’s CEO, the firm is moving to the next stage to grow its wealth management and capital market business in the U.S. through organic growth and acquisition.

Jul

2014

FINRA Denies Brokerage Firm Against Former Broker

A FINRA arbitration panel has denied the claims of Paracap Group LLC, an Ohio based brokerage firm, against its previous employee, Charles R. Crowley, and has recommended the expungement of the Termination Explanation from Crowley’s U.5 registration record on BrokerCheck.

Crowley, as a minority shareholder of Paracap Group LLC, was engaged in a bitter dispute with his employer, involving the rights of minority shareholders. Paracap used this as a justification for terminating Crowley without justification.

Jun

2014

Wirehouse Reps Move Dramatically to Fee-based Model

From the Desk of Jim Eccleston at Eccleston Law Offices:

Wirehouses are shifting away from a commission-based brokerage model to a fee-based business model. Over the past decade, the number of fee-only and fee based advisers has increased to 84% at the wirehouses, compared with about 57% for the rest of the brokerage industry.

The challenge is to find an appropriate price for advice which is competitive with what others in the industry are charging. Some advisors charge between 0.75% and 1% of assets under management as an annual fee rather than drawing commissions. In order to offset the decline in commission, advisers undertaking the move must be prepared to generate revenue from different sources or to make the shift incrementally.

The fee-based account gives advisers a more stable source of revenue that, over time, allows them to market and to focus on existing clients.

Jun

2014

CFTC Issues First Whistleblower Program Award

From the Desk of Jim Eccleston at Eccleston Law Offices:

The Commodity Futures Trading Commission (CFTC) has made its first award to a whistleblower as part of its whistleblower program created by the “Dodd-Frank” Act. The tipster will receive approximately $240,000 in exchange for providing actionable information about violations of the Commodity Exchange Act.

The CFTC’s whistleblower program offers monetary awards to those who voluntarily provide information about violations of the Commodity Exchange Act resulting in more than $1 million in monetary sanctions. Whistleblowers are eligible for 10 to 30 percent of fines collected. The Commission also can pay awards based on monetary sanctions collected by other agencies in actions that are related to a successful CFTC action.

According to director of the commission’s Whistleblower Office, the CFTC is attracting high-quality tips and cooperation which it might not otherwise receive and which already is having an impact on CFTC’senforcement mission.

May

2014

Wirehouses Hunt for Bank Channel Talent

From the Desk of Jim Eccleston at Eccleston Law Offices:

Wirehouses are recruiting top advisors from the bank channel. As the broker-dealer industry becomes more competitive, even big firms are becoming much more flexible and open in their recruitment in order to ensure success and meet their aggressive recruiting goals.

The effort historically has been risky. Most bank advisers build their businesses through company referrals rather than prospecting, so clients often are less willing to transfer their assets. Moreover, bank advisers pose legal risk. While most brokerage firms have signed the Protocol for Broker Recruiting, banks have shied away.

Bank of America Merrill Lynch is a member of the protocol, for example, but that does not apply to advisers in its bank channel, Merrill Edge. J.P. Morgan Securities signed on earlier this year, but clarified that it was limited only to the few hundred advisers in its private client group and excluded the JPMorgan Chase Private Bank.

In addition, bank advisors face tighter restrictions on what client information can be taken. Morgan Stanley was sued earlier this year when it recruited a trust adviser from PNC Bank. PNC accused the firm of helping the adviser misappropriate trade secrets. Bank advisers have employment contracts that have non-solicits or non-competes, or event sometimes a garden leave provision of 30, 60, or 90 days. Competent legal counsel, such as Eccleston Law, should be retained to review and consult.

Another concern is that many bank advisers are working with mass- affluent clients with less than $250,000 in assets, while most wirehouse accounts require investible assets of greater than $250,000 for the adviser to receive a payout. Still, wirehouse managers are willing to take on the risk, especially if a successful bank hire can provide a connection to a big-name client.

May

2014

UBS Advisers Stage Revolt to Save Branch Manager

From the Desk of Jim Eccleston at Eccleston Law Offices:

UBS brokers in San Francisco recently staged a kind of mutiny with some prepared to resign in order to prevent their popular branch manager, Michael Williams, from being replaced.

The firm considered replacing Williams due to poor branch performance. Of the firm’s eight geographic regions, that region was ranked among the lowest in terms of recruiting.

Moves are common in the brokerage industry, where managers are frequently reassigned, relocated or sometimes fired as firms keep a close watch on performance. Advisers may be reluctant to see their manager go, but it is rare for the firm to backtrack on its decision.

About 20 of the 75 advisers objected. Many included top producers, who began placing calls to executives at the firm, including the head of the adviser group, the head of wealth management, and the firm’s chief executive. They told the executives the move was a mistake. Support for Mr. Williams mounted, and by the weekend, the firm reversed its decision.