The sudden pick-up in these seemingly self-defeating dismissals by Wall Street firms suggest new vigilance against gradual breakaways

September 22, 2014 — 5:48 AM UTC by Brooke Southall

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Brooke’s Note: It is well known that the wirehouses are under siege from a burgeoning breakaway movement. They have tried all they can do to stem losses, but perhaps this firing is an example of what any besieged desperadoes would do when all else fails — start taking out hostages. Of course the firing actions will not have too much psychological effect on people outside Wall Street firms. But it doesn’t have to. It just needs to create a little more fear within.

In what could well be an emerging trend of making a final goodbye out of what used to be just a wrist-slapping infraction, Merrill Lynch fired an advisor team from its elite Private Banking and Investment Group for advising clients on the purchase of a hedge fund not on the Merrill Lynch platform.

Stephen S. Brown and James P. Goetz of Pittsford, N.Y., who managed about $2.5 billion of assets, left Merrill Sept. 9, according to Reuters and InvestmentNews. See: After Merrill Lynch allegedly 'crippled’ their careers, two advisors are prepping a big counterstroke, lawyer says.

That’s the fifth such scenario to play out in the last three months from wirehouses and two of the terminated teams managed assets as large or larger than this one, according to Brian Hamburger, chief executive of Hamburger Law Firm in Englewood, N.J.

“These are five situations that in the past were not a terminable offense,” he says.

Because Merrill Lynch was aware that the punishment seemed, on the surface, not to fit the crime, it convened all the 40 brokers in the Pittsford branch to explain just how serious the matter was, Reuters reports.

Typically, after such convening of humanity throws off scuttlebutt but that has not happened thus far in this case, deepening the mystery.

“It’s crazy, crazy quiet,” says Danny Sarch, principal of Leitner Sarch Consultants, a wirehouse recruiter. “I started making calls to people at PBIG [Private Banking and Investment Group] who made calls and it’s quiet.” See: The backstory of how a Merrill UHNW team found love in the time of U-5 — but not with an RIA.

He added that he received incoming calls from senior Merrill brokers concerned about 'selling away’ being a potentially career-ending offense. One broker had, for instance, been sending all his loan-needing clients to banks outside Merrill Lynch because of bad post-referral experiences internally. Others send clients to insurance brokers externally all the time.

Still, hedge fund selling away is a different animal. FINRA rules prohibit stockbrokers from selling investment products not vetted and otherwise processed by their registered brokerage firm. See: After Morgan Stanley 'raided’ Schwab branch in San Francisco, Schwab fought in FINRA 'court’ and lost, but perhaps won on the larger level.

$5-million-plus families

Brian Hamburger: That's why we do this under the cloak of darkness and all at once.
Brian Hamburger: That’s why we do
this under the cloak of darkness
and all at once.

Hamburger says selling away is indeed a serious breach of the rules. Brokers are only allowed to give advice that is solely incidental to a trade. If the broker is receiving a commission from another party, then that is an even more egregious breach.

Although it’s not all clear what happened here with these Merrill brokers, their self-reported client base suggests that they were operating in a rarefied level of wealth management with rich, powerful clients that include upper-strata executives and professional athletes.

Brown’s LinkedIn page describes his clientele as “an exclusive group that caters specifically to families and companies with net worths in excess of 5 Million dollars. In our practice, we work with 41 families and 20 companies, my average account size in 20 Million in assets. We advise several CEO and CFO’s of fortune 500 companies, as well as some professional sports teams.” See: Ken Fisher keeps expanding his $42 billion RIA empire despite UHNW head winds.

Brown’s profile adds: “I have been noted as a top Advisor by Barron’s (Top 100 and Top 1000 for 2008 – present); Registered Red (Top 100 from 2007 to present); Plan Sponsor Magazine (2007 – present); Plan Advisor Magazine (2010 Top 100) and 401(k) Exchange (2010 top 300).”

Preemptive strike?

Goetz’s LinkedIn profile has no photo or descriptive material of any kind. The Brown profile lists employer as “TBD.” Both men have been purged from the Merrill Lynch website. What can be seen from Google caching is that Goetz has been with Merrill Lynch since 1997 and Brown since 1991. See: The number one obstacle to completing a clean breakaway from a wirehouse. and Paul Pagnato and David Karp who formed Pagnato Karp Group. See: Fearless Merrill Lynch team breaks away with $1 billion in broad daylight.

That such loyal, long-cultivated Merrill Lynch employees have been shown the door for something that might not have provoked this response before suggests that some new macro-force or predilection is at play.

Srach gives one example he is familiar with where one Merrill Lynch broker client was doing an offering of a private placement and another client was interested in it. The Merrill broker facilitated an introduction between the two players in his offices. When the investment went bad, the client sued and Merrill gave the broker the hook.

Hamburger says it’s likely that the new force or legal reflex has been unleashed due to a hair-trigger response the wirehouse has developed since losing its biggest and best teams to independence. Other defecting powerhouse PBIG teams include David Hou and Mark Sear to Luminous Capital and Paul Pagnato and David Karp who formed Pagnato Karp Group. See: Fearless Merrill Lynch team breaks away with $1 billion in broad daylight.

“The firms are demanding loyalty,” Hamburger says. “It’s one of the regulatory protections that creates a really bright line about whether you’re in or out. That regulatory protection is used for protecting the workforce even if it’s being used in a way it was never intended.”

Making an example of a firm here and there may be worth it for Merrill Lynch considering it has 150 PBIG teams and more than 13,000 brokers that it hopes to keep on its staff as breakaway broker movement continues its advance. See: The Leading Indicator: Trends and tales from the breakaway broker movement.

U5 critical

Mindy Diamond: If they were to become an RIA and give up series 7, then trading away is not bad at all.
Mindy Diamond: If they were to
become an RIA and give up
series 7, then trading away is
not bad at all.

The irony here is that trading away is typically associated with best practices of RIAs looking for the best deal for clients.

“If they were to become an RIA and give up series 7, then trading away is not bad at all,” notes Mindy Diamond, principal of recruiting firm Diamond Consultants of Chester, N.J., in an e-mail. See: 6 reasons why RIAS can’t — or don’t want to — have track records.

But if Brown and Goetz are pondering starting an RIA or joining another firm, then they have some quick maneuvering to do. Hamburger says the key is for the Brown-Goetz lawyers to make clear to Merrill Lynch that the U-5 language needs to be relatively benign or that the firm will face U-5 defamation charges. The U-5 isn’t finalized for 30 days but then remains a permanent mark on the advisor’s record. No wirehouse will take on a fired broker unless the U-5 language is relatively benign, Hamburger says. See: Can advisors keep their dirty compliance laundry in the closet thanks to lack of NASAA, SEC and FINRA coordination?.

Hamburger says that if wirehouses were loose on this issue that brokers could gradually move their practices to another platform. “That’s why we do this under the cloak of darkness and all at once.” See: MarketCounsel launches legal hyperspace button for breakaways who get fired by Merrill Lynch (and friends) before the 'go’ date.

Background check

In 2013, Brown settled a case with a client for $510,905. The client claimed he did not understand the risks of the commodity options he bought. Brown is on record with BrokerCheck saying he disclosed the risks and that the client understood them, according to the Reuters article.

Brown did not reply to a request for comment made through LinkedIn.

Goetz’s BrokerCheck record appears to be squeaky clean.

The lesson for Merrill Lynch — and indeed wirehouse brokers in general — can cut both ways, according to Sarch. Obviously some brokers will double down on 'loyalty’ as defined in a fire-at-will atmosphere. “Loyalty is just a way to say: I’m afraid to leave.”

The second way is to be proactive in insuring that legal lightning never strikes with its demoralizing effects.

“It’s harsh,” Sarch says. “Ultimately they can kick you out. I better get on my own so nobody can ever do this to me.”


Mentioned in this article:

MarketCounsel
Regulatory Attorney, Consulting Firm, Specialized Breakaway Service, Mergers and Acquisition Firm, Compliance Expert, RIA Set-up Firm, Outsourcer, Regulatory Consultant, Business Broker, Conference, Data and ratings for RIAs
Top Executive: Brian Hamburger

Diamond Consultants
Recruiter
Top Executive: Mindy Diamond

Leitner Sarch Consultants
Recruiter
Top Executive: Danny Sarch



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MrRIA said:

September 22, 2014 — 6:15 PM UTC

This is the dumbest rule. Can you imagine criticizing a CPA for recommending a product that is firm didn’t recommend? Especially if it was better than anything the “firm” approved of? FINRA is using a firm-centric model rather than an client -centric model. Who cares what these firms think. This is between the professional and the client.

FINRA’s rules are designed to protect firms, not clients. That’s why they are afraid of the 40 act.

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David said:

September 23, 2014 — 2:30 AM UTC

Exactly why our team left this same firm several months ago. They have no clue on how to manage a culture and only want to manage to the lowest common denominator. Can’t wait to see the next article in a few months discussing how Stephen and James successfully took their entire 2.5B in assets and then some independent! Wirehouse firms have no long-term future. If you disagree, just look at the trends or conduct your own client study—no one wants the B.S. product push disguised as advice.


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