Fleeing Brokers Can Take Some Client Info

Three of the nation’s largest brokerage firms have agreed to make it easier for registered reps to take clients with them when they change firms—eliminating a lot of the cloak-and-dagger antics that brokers undergo when they decide to move to another broker/dealer.

Merrill Lynch, Smith Barney and UBS Securities announced that they would allow registered reps going from one firm to another to take easily obtained client information, including names, addresses and phone numbers. But departing advisors won’t be able to take account information. The three firms, which employ some 33,000 reps, also invited other firms to join this accord, which was announced Monday evening. A Morgan Stanley spokeswoman said that firm has also been involved in the negotiations and would be participating. The talks have gone on for more than a year.

Allowing reps to have access to keep this information when jumping from one firm to another means that reps won’t have to surreptitiously copy numbers to a personal pager or electronic device under the guise of a “birthday list,” or copy down sensitive account numbers that firms would rather not let them take with them either.

“This will be better for firms, clients and the brokers themselves,” says Mark Elzweig, a New York-based recruiter for the industry. “It’ll eliminate a lot of unpleasantness that has placed clients at a disadvantage and has not reflected well on the industry’s image as a whole.”

That unpleasantness that Elzweig refers to was the practice of issuing temporary restraining orders (TROs) on client accounts when a rep announced—usually on a Friday evening—that he was leaving the firm, and, in addition, had already delivered scores of account transfer forms to the competing brokerage firm across the street. Registered Rep. detailed this messy process in a April 2003 story. Richard Ryder, editor of Securities Arbitration Commentator, a newsletter about arbitration cases, last year estimated that between 500 and 1,000 such injunctions are issued on a yearly basis.

Ostensibly, firms were prohibited from automatically freezing client accounts in this matter in late 2001 by the NASD, but continued to do so over the next three years, because in most cases, reps had often signed non-solicitation agreements with their b/ds, which would ostensibly prevent reps from contacting clients. Merrill Lynch was known to be particularly aggressive in this regard, retaining outside counsel to issue temporary restraining orders to block account transfers.

What often resulted was the specter of a firm suing to block one broker from taking his clients with him while gladly accepting account transfer forms from a new rep who was walking through the “In” door at the same time.

“The firms don’t have to be hypocritical in defending a broker they’re trying to recruit and then prosecuting a guy that left their firm,” says Danny Sarch, president of Leitner/Sarch Consultants in White Plains, N.Y. “It’s long overdue. I think smaller firms were intimidated and brokers were intimidated.”

However, this doesn’t mean that competition for clients still won’t occur. A departing rep can expect that his former co-workers will be aggressively pursuing the clients to try to keep them on. (Discounted trades and other perks are frequently offered a departing rep’s clients.) And with the increased amount of asset-based business and attempts to “institutionalize” the client, firms have been more successful in this regard lately. Large producers who switch firms routinely say they keep the bulk of their clients, however, with the exceptions of ones that they don’t want. According to the SIA, 19.3 percent of registered reps left their firms in 2003, about in line with the 20.8 percent figure in 2002, and 19.2 percent figure in 2001. Both Merrill Lynch and Smith Barney have, in the past, said their turnover is in the single digits, but nonetheless, the sheer volume of turnover resulted in expensive litigation as a result of client transfers being held up. “Any agreement that enhances an investor’s ability to switch firms with a minimum of inconvenience is in the investor’s best interest,” said an SIA spokeswoman.

Chart: Getting Sticky
Likelihood of clients leaving a firm when their broker departs.

  • UBS 70%
  • Smith Barney 55%
  • Morgan Stanley 38%
  • Charles Schwab 15%
  • Source: Smith Barney Affluent Investors Survey, September 2003

    “This will probably become the standard in due time,” says Elzweig. The agreement is expected to take effect in fourth-quarter 2004.

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