WealthManagement Magazine

PaineWebber to Institute Tougher Non-compete Agreement

In 1998, when PaineWebber doubles the number of its broker trainees--from 600 in 1997 to 1,200--it also will institute a new and tougher training contract which will state that brokers cannot contact their clients for a period of six or 12 months if they move to another firm, according to Mark Sutton, the firm's executive vice president and director of its retail division.That makes PaineWebber the

In 1998, when PaineWebber doubles the number of its broker trainees--from 600 in 1997 to 1,200--it also will institute a new and tougher training contract which will state that brokers cannot contact their clients for a period of six or 12 months if they move to another firm, according to Mark Sutton, the firm's executive vice president and director of its retail division.

That makes PaineWebber the fifth of the six largest brokerage firms to take that tack with its trainees, joining Merrill, Prudential, Smith Barney and Dean Witter. A.G. Edwards is now the lone exception in not requiring non-competes from new hires.

Sutton made his remarks at a "media briefing" at PaineWebber's corporate headquarters last December. He also confirmed that PaineWebber would adopt the same tactic of pursuing its trainees with temporary restraining orders (TROs) in the courts to enforce its restrictive covenants.

"It's just a matter of protecting the resources of this firm," he says. "We're going to make a big investment in these people, and it's kind of foolish for us not to have the same protection in place that the other firms have," he said. "If they want to go to work somewhere else, then that's perfectly fine with me, but it doesn't mean that I ought to allow them to take the assets of this firm somewhere else," he added.

The new contract still hadn't been written as of December, but Sutton indicated it would be in place by the end of 1997. He wasn't sure whether the non-solicit period would be six or 12 months.

What about clients getting caught in the crossfire when firms enforce non-compete agreements? Sutton remarked that he has "no interest" in "a lot of these silly games that go on," and "we've been very specific with our managers" in directing them to tell clients where a broker has gone--if the client asks. "We have no interest in disparaging anybody." The firm will "compete like hell to keep that business," but it will "all be above board; all very straightforward," he said.

Sutton pegged training costs for a new hire at $100,000 but said the firm will not pursue trainees for costs if they drop out of the industry.

PaineWebber hasn't done much training in the past. In 1995, the firm had just 250 trainees; that number rose to 400 in 1996 and to 600 in 1997. Currently, the firm has about 6,300 brokers, so 1,200 trainees would be a major addition. Many will come straight out of college, Sutton said.

"The conventional wisdom in this business has been that you don't hire these kids out of school [but that is] something that I've never believed." As a branch manager in Austin, Texas, Sutton recalled that "we had the trainee of the year, several years in a row, all of them right out of school."

The firm claims 40% of its trainees are still in the business three years out. Sutton said that figure was typical throughout the industry. "This industry has a horrible success ratio for bringing new people in," he admitted.

PaineWebber is trying to raise its trainee-retention rate to the two-thirds level in a number of ways--first of all, through better selection, Sutton said. The firm has added "a lot of infrastructure--hiring officers, divisional training officers [and] a protocol of interviews that everyone has to go through before we can hire them." There is, he admitted, "no magical training program out there that's going to get a lot higher success rate."

The firm also has instituted a "formal" mentoring program where the trainee works with a senior broker for a period of two years, and then "decides whether they want to go out on their own, or whether it makes sense to stay in more of a partnership arrangement with that senior broker," Sutton noted.

Sutton claimed PaineWebber's brokers are now grossing an average of $385,000 to $400,000 a year, and that average includes its trainees. He predicted that even with a much higher number of trainees next year, the firm's 1998 average productivity per broker would still hit the $400,000 mark.

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