Wednesday, April 22, 2009

Smaller RRs Being Forced Out

Since I spend a fair amount of my time representing brokers who are changing firms, the fact that the wirehouses are dumping small producers is not news to me, or to my colleagues who work in this arena.

I have blogged about this in the past, here for example, and
Registered Rep has an article today detailing the size and scope of these terminations. According to the article, UBS is cutting over 2,000 employees in its wealth management group, many of them advisors - to the great concern of producers at less than $300,000. Merrill changed its grid in December, cutting payouts in half for $200,000 producers.

As a businessman, I understand the cuts. It is difficult for a firm the size of UBS or Merrill to support a rep who produces less than $300,000, and while they won't say it, quite frankly, they do not want those reps.

They will however, be quite pleased to keep their assets, and the part of the story that goes unsaid is that the firms in fact work hard to keep the assets after they force the small producer out.

We have been dealing with the ramifications of ever-decreasing payouts for smaller reps for years. Because of such tactics, brokers need to leave their firms, which can multiply the problems. Now, in addition to dealing with a 50% cut in payouts, the departing rep needs to deal with an upfront loan that becomes payable when he resigns.

It truly is a difficult spot, and one that is not easy to work out of. The firm cuts the broker's income in half, but still expects to be paid the full amount of the loan, and insists on compliance with the non-compete and non-solicitation aspect of the loan documents.

Of course, given the Broker Recruiting Protocol, the solicitation threats may be hollow whining, but these brokers truly are getting the short end of the stick, and many are fighting back, retaining lawyers and filing arbitrations for breach of contract. And, at the same time, taking their book and going independent, or becoming investment advisors.

The promissory note or EFL cases are not easy to win, but the outrageous nature of the situation that the firms are putting some of these reps in puts an equitable gloss on the claims that have some appeal.

The smaller RRS may truly have the last laugh, since the payout at an independent can be multiples of the reduced payouts at the wirehouses - with similar platforms and products.

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