Eccleston Law Offices

Aug

2015

Wirehouse Sues Registered Investment Advisory Firm

From the Desk of Jim Eccleston at Eccleston Law LLC:

A battle between Wells Fargo Advisors and a former employee turned ugly when emails leaked showing the employee purportedly had funneled business to his new firm, while still employed at Wells Fargo.

Wells Fargo accuses the rep of funneling business for eight months before he officially left the company. He is alleged to have breached his fiduciary duty and to have engaged in a “civil conspiracy.” Wells Fargo is asking for more than $1.7 million in damages.

The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services.

Oct

2014

Advisers Face Challenges to Make Acquisitions Work

From the Desk of Jim Eccleston at Eccleston Law Offices:

According to a recent survey conducted by Aite Group and sponsored by NFP Advisor Services, most advisors are facing challenges from different aspects when they look to pick up a book of business to build their own practice.

Client retention was the most difficult challenge. Even in the most successful acquisitions, which the survey called “alpha acquisitions”, the average retention rate of clients was 76%. Around one third of respondents said they kept only 44% of the clients from the acquired practice.

Another challenge was finding the right match in terms of geography, product lineup and age. More than half of all successful acquisitions happened between two people who were personal contacts before the deal. Only 10% were brokered by an external consulting firm. Moreover, many of the most successful acquirers took three years or more to find their partner.

Another stumbling block is determining what to pay for the practice presented. The 25% of acquirers who reported being most satisfied with the deal also reported paying more. According to the survey, factors for pricing were assets under management, client service model, revenue mix, business longevity and cash flow from operations. More than half the alpha acquisitions were financed entirely by the acquirer without loans. In 73% of the cases, advisers who were not satisfied by their purchase took out personal loans.

Once a deal was finalized, the majority of advisers in the successful acquisitions had transitioned the business within a year, however, while it had taken three years or more for the less successful acquisitions. In total, 36% of the alpha acquisitions reported an increase of more than 10% in revenue for the acquired practice. While only 3% of non-alpha acquisitions reported the same.

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

Brokers Under Pressure To Sell In-House Products

From the Desk of Jim Eccleston at Eccleston Law Offices:

Two former private bankers at Deutsche Bank filed a suit recently, alleging that their bank pushed them to steer their clients’ money into the bank’s own investment products even though those products were against the clients’ interests.

According to a survey, the pressure to favor in-house products is “very common” at banks and securities firms, especially when it came to higher-fee “alternative investments” like hedge and private equity funds.

Over the last two decades, some brokerage firms have moved away from business models favoring their own firms’ funds. However, advisers still routinely feel pressure to bolster their commission revenue, giving them an incentive to steer clients into higher-fee products to “pump up their production.”

Morgan Stanley, the nation’s largest retail force with 16,316 brokers, has less than 5 percent of its clients’ managed-account assets in Morgan Stanley-sponsored funds. At the Merrill Lynch unit of Bank of America, its 13,845 brokers also have less than 5 percent of its $552 billion in managed client accounts in Merrill’s own funds.

However, percentages are higher at some other big-name firms. Private bankers at Goldman Sachs, for example, typically put a majority of clients’ cash and fixed-income investments into Goldman funds, while steering a majority of their higher-risk assets such as actively managed stocks, hedge funds and private equity to external managers.

Likewise, Deutsche Bank’s roughly 335 brokers in the United States invest about 34 percent of their client account assets in the bank’s own investment products. JPMorgan Chase reduced the average percentage of its own funds in the accounts of Chase Strategic Portfolio, to about 31 percent from about 42 percent, according to the program’s current brochure.

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.

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.

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.

Apr

2014

Five Issues Worth Thanking About In Selling Your Advisory Practices

From the Desk of Jim Eccleston at Eccleston Law Offices:

According to a report by Mark Elzweig in his Think Advisor publication, there are the five issues:

First, cash down payments: the less involvement sellers have, the more they will want up front. Down payments typically range from 10% to 40% of a practice’s value. The value, of course, is a moving target. In 2013, FP Transitions says that the average cash down payment was 33%. And the true value is determined between a willing buyer and a willing seller.

Second, adjustable rate notes (ARNs) for the practical sellers: ARNs basically are promissory notes issued by the buyer that guarantee the seller payments of principal plus interest. That means sellers will want to keep a hand in the practice, adding as much value as possible by smoothing relationships with existing customers and helping the buyers transition and retain assets. The ARN payouts can vary dramatically both in timing and size. Some are paid annually, others every few years. Interest rates can be adjusted up or down depending upon the buyer’s attainment of asset and/or revenue targets. The incentives need to encourage both buyers and sellers to do more, not less.

Third, earnouts: another incentive for sellers to remain involved. Earn out bonuses mean sellers need to do all they can to encourage the success of their buyers, and like back end bonuses, typically set both gross revenue and asset bogies.

Fourth, taxes: everyone pays them, but only one gets to claim the capital gains rate. Advisors who have owned their practices for more than one year can elect to have the proceeds from a sale taxed at capital gains rates. However, the buyer must agree to be taxed at ordinary income on the same transaction.

Fifth, revenue multiples: what everyone always looks at first. Sellers should seek buyers with similar types of practices and philosophies. Hammering out a deal requires patience and savvy. Before selling their practice, advisors should have inspected potential buyers to be sure they are a good match.