The odd case of MetLife's claim that it's being bullied by LPL

Brooke’s Note: Wirehouses get seriously picked on in the pages of RIABiz. We make no apologies. Wirehouses are often dehumanizing places for the financial advisors who work there and require a vigilant caveat-emptor stance on the part of the consumers who place their assets with those brokers. A stockbroker’s first duty is to their employer, not the consumers they call clients. But if there exists a more antiquated and despised agglomeration of financial advisors, it is those who still toil under the banner of big life insurance companies as distribution arms for makers of policies and annuities. Buying such precariously opaque, complex and downright expensive products under such high-commission circumstances is bad enough. Toss in having the salesman predisposed to sell their brand and only their brand and it’s particularly consumer unfriendly, hence advisor unfriendly. This is why brokers at MetLife, John Hancock and the like are sitting ducks for LPL recruiters. LPL, like Raymond James, Commonwealth and a host of others, offer an open pantry of brands and is guided by a culture that encourages playing one product brand off the other for the benefit of consumers. LPL can also offer the removal of any fiduciary glass ceiling: push comes to shove, it’ll provide custody for an RIA. What’s interesting here is that MetLife’s lawyers have found advantage in LPL’s runaway recruiting success against its IBD by elevating its status from poaching to raiding. But the argument that somebody has to stop in a free enterprise system because they are being too effective — even when it wins, as it appears to be doing here — has to be viewed as foreshadowing massive long-term loss for the plaintiff and an opportunity to bring talent to more independently geared companies.

LPL Financial’s ace recruitment team has been mercilessly strafing MetLife as embodied by Snoopy and, in retaliation, the world’s largest provider of life insurance and annuities has assumed an unaccustomed role — that of underdog.

New York-based MetLife Inc., with its market capitalization of $60 billion, has filed suit against the Boston-, San Diego- and Charlotte, N.C.-based independent broker-dealer and is employing a little-used strategy — essentially alleging that it is being unfairly overpowered and undermined. See: The FPA is now brought to you by MetLife, for better or worse.

“LPL has been engaged in an ongoing, nationwide campaign to raid MetLife’s workforce,” are the fiery opening words of the lawsuit against LPL. The claim MetLife filed both in the U.S. District Court of Northern Illinois and with Washington-based Financial Industry Regulatory Authority Inc. earlier this summer argues that LPL Financial has systematically poached more than 60 of its reps, brokers and employees going back to October 2014 and “shows no signs of stopping.”

Do I have your attention?

Indeed, a case can be made that LPL, which has a market cap of $4 billion, has the big guns on this particular battlefield. LPL boasts a field force of 14,000 affiliated advisors to MetLife’s 5,000 and has developed a fearsome recruiting machine kept in fighting trim by virtue of its relentless picking off of advisors from Merrill Lynch, Morgan Stanley and Ameriprise. See: LPL lures top execs away from Merrill Lynch, MSSB.

But while legal experts contacted for this article are skeptical about whether MetLife can make a raiding lawsuit hold up in court, it may well be having its intended effect.

“Sometimes litigation is brought just to send a message,” says Sharron Ash, MarketCounsel Inc. chief litigation attorney. “It can be a very valuable way to slow down the bleeding.” See: Why you may not be adequately covered against lawsuits.

Thomas Lewis: LPL is probably slowing
down its hiring.

The claim does not specify damages. It is now in mediation and is unlikely to ever see arbitration, says attorney Thomas Lewis of Stevens & Lee in New York.

Both Lewis and Ash say that simply filing the raiding claim has forced LPL to put a stay on its hiring of MetLife advisors. If MetLife hadn’t filed the lawsuit, says Lewis, it’s hard to say how many more advisors might have been recruited away with impunity.

“It has garnered LPL’s attention,” he says. “LPL is probably slowing down its hiring [from MetLife].” Lee’s firm has 13 offices on the East Coast that specialize in raiding cases. The firm is not involved in that case. See: Cetera raises its strategic profile to 'baby LPL’ status with MetLife deal.

Both LPL and MetLife declined to comment for this article.

Hamstrung

Putting the unusual Goliath suing David aspect of this suit aside, there is another irony: MetLife taking an antagonistic stance toward one of its largest product purveyors. LPL’s biggest source of revenue comes from its sale of annuities, of which MetLife is an important supplier. See: An inside look at why LPL Financial is leading the charge with fee-based variable annuities.

But while LPL’s independent status may give it the upper hand in recruiting brokers away from MetLife, that same independence makes it hard to exact retribution for the lawsuit, since LPL advisors can continue to sell MetLife products whether the big bosses want them to or not. After all, it’s not as if LPL could simply tell its advisors to get rid of all MetLife products, nor could it legally put an end to existing contracts, says Ryan Shanks, CEO of Finetooth Consulting in Longmeadow, Mass.

“So MetLife is in essence, saying, 'What are you going to do, cancel our contracts?’” says Shanks. See: How MetLife Securities may use one new Philly rep to boost talent retention and development.

“MetLife is playing that card,” he concludes, and the mega-company appears to have a strong hand.

Shanks has seen this strategy in action before when he worked for an independent broker-dealer that had ties to a mutual fund company. There would be times that his boss would get calls from bigger firms telling him to back off from recruiting its advisors. And, even though it wasn’t doing anything technically wrong, the mutual fund would comply.

“There’s a good chance LPL backs off,” he says, because he believes they’ve had enough bad press lately. “They don’t need another black eye.”

Major downer

And even if LPL doesn’t back off from its recruiting, the lawsuit could very well make potential MetLife defectors think twice. In the lawsuit, the insurance giant named six former MetLife advisors who left to form an LPL office in April.

The recruitment of eight advisors out of its Downers Grove, Ill. office — an office MetLife claims was one of its top-producing offices in the country — seems to have been the last straw for MetLife. Six of those eight advisors were named in the claim. After the exodus that office, now doing business as the Premier Wealth Group, has 16 people left on staff. The advisors took about $490 million in assets when they left.

MetLife employees who are looking toward LPL, says Ash, are going to take note. No one wants to deal with the time, money and hassle of being named in a lawsuit, even if the legal fees and liability are covered by LPL. See: How Schwab failed to block one broker’s breakaway and what the legal battle may mean for the future.

According to MetLife’s claim, Jeffery Harper, a financial service rep out of that Downers Grove office doing business as Harper Wealth Management, left abruptly in April after 25 years with MetLife. The claim alleges that his plan to leave came to light when he tried to reschedule his annual conference trip, earned as a reward from MetLife, since he knew he would no longer be with the company by the planned August date. According to the complaint, “He ominously foreshadowed that many more MetLife employees would be leaving soon as well.”

In May, six more financial service representatives left the Downers Grove office, some of whom were working under Harper Wealth Management. Another followed a few weeks later. They are all now doing business at LPL as Opus Wealth Partners LLC. See: How MetLife Securities may use one new Philly rep to boost talent retention and development.

Especially galling to MetLife, it appears from its claim, is that Harper had worked with an LPL transition team to create a plan for recruiting other MetLife advisors and clients in order to ensure his new business would be successful. The advisors who left submitted resignation letters with extremely similar wording and the same lawyer listed as point of contact, on the same day, according to MetLife. See: MarketCounsel launches legal hyperspace button for breakaways who get fired by Merrill Lynch (and friends) before the 'go’ date.

“LPL’s business model depends on targeting and luring away financial advisors from their current employers, such as MetLife, and poaching their clients,” reads the claim. See: How LPL used its RIA love and long OSJ leash to lure Wells Fargo’s $550-million FiNet team in Louisiana.

Any lifeboat in a storm

But even with these factors in play, a raiding claim is still very hard to prove.

“If there’s one rule about raiding it’s this: there are no rules,” Ash says.

Ryan Shanks: MetLife is bleeding advisors.
In reality, they should be looking
in the mirror.

A rule of thumb for the arbitration panels or judges in these cases is that the offending company must take about one-third of the headcount and/or revenue of either the rival firm or of a specific branch. Even more difficult to prove: there must be an intent to harm. To make out a successful case, the plaintiff must usually produce similarly worded letters and document things said in passing that can be construed as “ominous foreshadowing,” and point to new offices set up in advance. Even armed with this sort of evidence, such a lawsuit can go either way, says Ash. See: Loving Merrill but leaving Merrill, two 38-year olds and an 'old guy’ take $700 million of assets to an RIA citing the model’s better mousetrap.

LPL, conversely, can argue what is known as the lifeboat defense, says Lewis. Something to the effect of: These advisors were going to leave MetLife anyway and LPL simply offered them an attractive landing pad. To that end, LPL might point to reasons employees might choose to leave MetLife, not an insurmountable task given that the insurance company has changed its compensation system in recent years and, at the time of the Downers Grove defections, was in the process of changing clearing firms from Pershing LLC to Fidelity Inc.'s National Financial Services LLC, a move that would require repapering of all clients.

If you’re already going to have to do that, says Ash, “it’s a great time to leave.” See: First Allied builds a bridge to potential Securities America defectors.

MetLife has shed thousands of brokers in the last few years and merged a number of its subsidiaries. “It sounds to me as if MetLife was going through a lot of changes and people opted to pick up and leave, and LPL offered them a safe landing,” says Lewis.

MetLife has another unresolved lawsuit against a former manager in Las Vegas. That suit alleges that Jimmy Lee and the advisors who left with him violated non-solicit and non-compete agreements in their move to LPL. But in this case, Lee is counter-suing MetLife for plundering his office for files and information. See: Backs to the wall, wirehouses renew legal efforts to stem team breakaways — with junior partners sparking the tension.

Missiles in silos

MetLife is indeed an attractive recruiting target right now, says Shanks. “MetLife is bleeding advisors. In reality, they should be looking in the mirror.” Once defections have started, the process gains its own momentum, he says. “You’re catching some fish, so you stay there and catch more, and tell your friends about it.”

Both companies are signees to the Protocol for Broker Recruiting, which governs how advisors leaving a firm can solicit and what information they can take with them under certain conditions. But, in the advent of a breach of contract or a raiding claim, an existing advisor can still be vulnerable to a lawsuit. See: Broker Protocol signings regain momentum amid new signs that the wirehouses could shut the breakaway portal.

LPL and MetLife may be locked in a Cold War, but they are never going to get the point of actually launching missiles, says Lewis, precisely because they have so many business interests intertwined. That, he says, is why the claims were filed with FINRA first and will likely go through FINRA arbitration if it came to that, instead of being heard in a regular court setting.

That’s because FINRA claims are not made public until after they’re resolved. Neither side wants too much of their dirty laundry aired. And that’s why the two parties are now in mediation anyway, likely to settle before even going to arbitration. See: In the duel of FINRA vs. state courts, one comes out on top for most advisors.

“It has settlement written all over it,” says Lewis.