Published December 07, 2012
NEW YORK – For brokerage firms, there's a fine line between aggressively recruiting financial advisers and raiding the competition - a difference that could cost millions of dollars.
Philadelphia-based brokerage Janney Montgomery Scott was awarded $2.4 million in early November after claiming its Salem, Ohio, branch was raided by rival Hunter Associates Inc. Janney alleged Hunter took "the entire branch management team, all financial advisers, and all other key personnel" to open and staff a new branch office.
Most broker raiding cases are handled in arbitration by the Financial Industry Regulatory Authority, instead of lengthier, more expensive court proceedings. So what constitutes a raid isn't very clear as FINRA does not publish evidence presented in arbitration and provides very little detail about how decisions are reached.
A raiding claim is typically made when a firm loses 30 percent to 40 percent of the production from a branch office in one swoop or over a short period of time, said New Jersey-based lawyer Tom Lewis, who works with brokers transitioning to new firms. Production - the revenue generated from fees and commission - is derived from a broker's client asset base.
Securities lawyers and headhunters expect more raiding claims to emerge because competition for financial advisers has reached a feverish level.
Brokerages are increasingly reliant on their wealth management arms to bring in steady revenue and profit, turning to star advisers to boost client assets. Replacing top money makers - who manage at least $100 million - is not easy, so firms act fast when advisers exit.
"Because money is tighter, they're not leaving anything on the table," said Chicago-based securities attorney Andrew Stoltmann, who said he expects to see more raiding cases over the next year.
Raiding claims can slow the movement of top advisers because some recruiters will bring over advisers in stages to minimize risks for the hiring brokerage.
"If we have a whole group and we want to move them from one firm to another, we might suggest two (advisers) move and then one month later, another move," said New York-based financial services recruiter Rich Schwarzkopf.
It's a strategy, although more cumbersome, that makes a raiding claim harder to win.
"Firms often lose their will to fight," Schwarzkopf said.
There is no official tally of raiding claims, but industry lawyers say they are more prevalent in the brokerage industry than other Wall Street sectors. The brokerages of Morgan Stanley , Wells Fargo & Co and Bank of America Corp have all made raiding claims in the last year or so.
The compensation a firm seeks for poaching a group of advisers is typically based on one year's production lost from the departing team members, according to industry lawyers. In some cases, the firm may also seek punitive damages.
John Finnerty, a professor of finance at Fordham University who studies raiding cases, said his researchers observed awards between $10,000 to $22 million, excluding punitive awards.
In Janney's case, the firm sought $3 million in compensatory damages. In a statement to Reuters, Janney said the $2.4 million award it received "affirms the just and equitable principles by which (the) industry operates in recruiting from competitors. It sends the message that a branch manager has a fiduciary responsibility to his or her firm.
A call to the lawyers representing Hunter was not returned.
Two years ago, St. Petersburg, Florida-based Raymond James Financial Inc was fined $12 million by an arbitration panel that found the firm improperly poached advisers from Wachovia Securities in 2007. Wachovia was bought a year later by Wells Fargo. Raymond James later said it reached a confidential settlement with Wells.
Smart recruiting sometimes can be viewed as raiding. Recruiters typically talk to between 25 and 40 advisers every month and it can take years to convince someone to jump ship. When they do, the reason usually involves frustration with their employer, making it more likely colleagues will leave, too.
"When you start to talk to groups of advisers, that's when you get into problems," said Mark Albers, a former manager of multiple branches at Merrill Lynch and Morgan Stanley. "But even if you may have had 10 separate meetings, if all the advisers decide to leave within a close time, it could potentially be raiding."
Finnerty, who also runs his own consulting firm, New York-based Finnerty Economic Consulting LLC, said the determination of a raid can be murky when there are multiple adviser departures in question.
If the departure of a few advisers affects the working environment of the office, thus prompting several more advisers to leave - even to different firms - that could be considered a raid, Finnerty added.
(Reporting By Ashley Lau; Additional reporting by Suzanne Barlyn; Editing by Chelsea Emery, Jennifer Merritt and Lauren Young)