Parting is Such Sweet Sorrow

In the name of client freedom of choice and the of personal financial information, you won't have to steal client addresses and phone numbers any more when switching firms that is, if you work for Merrill Lynch, Smith Barney or UBS Securities. In late July, those three firms who together employ more than 33,000 registered reps, or about one-third of the advisor population of the 20 largest firms announced

In the name of “client freedom of choice” and the “safeguarding” of personal financial information, you won't have to steal client addresses and phone numbers any more when switching firms — that is, if you work for Merrill Lynch, Smith Barney or UBS Securities.

In late July, those three firms — who together employ more than 33,000 registered reps, or about one-third of the advisor population of the 20 largest firms — announced that they had adopted a “new broker recruitment protocol” that would allow departing registered reps to take what they had been taking anyway. The idea, according to a rare group statement, was to “facilitate client choice and eliminate any inconvenience to clients resulting from litigation that can occur between firms and registered representatives when they make a move.”

Though account numbers are still considered firm property and may not be taken by the departing advisor, the firms agreed to “promptly execute” account transfer forms, should the client choose to leave along with his broker. (The agreement is to be put into effect in the fourth quarter, the firms said, and may be signed by other companies, including Morgan Stanley.) By decriminalizing (as it were) the taking of basic client info, the firms hope to reduce the confusion and legalistic bickering — the cloak-and-dagger tactics — that often mar a firm switch. After all, the injunctions and temporary restraining orders weren't in anybody's best interest, least of all the client.

That announcement, on its face, is quite significant and welcomed, advisors and industry recruiters say; but few view the agreement as a magic bullet to aid advisor migration. In fact, some view this as a way for firms to actually hinder broker movement and to dampen the arms-race-like compensation battles that break out over top advisors.

But that is an extreme view. More likely, says Michael King, president of Michael King Assoc. in New York, “This will eliminate all [the TROs], and in that way, it'll be good.” On the other hand, “Getting the client [account] information will be more cumbersome. It used to be they often took a Xeroxed copy of statements. Now, you'll have to ask clients to send you a copy of the statement.”

According to one securities arbitration expert, the agreement should eliminate or reduce the legal costs associated with 500 to 1,000 cases a year. Still, this doesn't mean brokerage management is going to let assets walk out the door uncontested. Sure, advisors won't have to surreptitiously stuff client data in their socks anymore. But steal account numbers, and you can bet the firms will sue. (Again, the only way for reps to lawfully get account information — such as asset allocations, holdings and the like — is to ask clients).

Also, firms will do what they've always done: Try to persuade your clients to stay by offering perks, such as free trades or other discounts. A Smith Barney survey from late 2003 suggested that some firms, particularly Merrill Lynch, were getting better at “institutionalizing” the client relationship via the addition of banking and other services. (Apparently, a client is more reluctant to leave if he has to change his checking account.)

Another reason it may be business as usual for departing advisors? Only three firms have signed on. “If I'm the producer and I leave to go make money somewhere else, I really don't care what the firms have agreed to,” says Anthony Paduano, a securities attorney with Paduano & Weintraub in New York. “Even if the five firms agree to it, I still don't care if it's LPL or Commonwealth or First Allied or wherever.”

So, enforcement on the sanctity of client account numbers will still be driven by the honor system: It's still up to branch managers (and other OSJs) to refuse to accept ACAT forms with account numbers that were provided by the brokers and not by the clients. Firm sources say they're going to have to educate supervisory personnel to abide by the rules, but some believe that such a system won't hold up and the usual bickering over clients will ensue.

Anyway, the initiative is weak unless several other large firms, including independents, sign on. As of now two of the five largest, Morgan Stanley and Wachovia Securities, have yet to agree. Two separate sources said Morgan was resistant, but a spokeswoman says that's not true. “We're going to be doing it,” she says.

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