Merrill Lynch may be facing a mass exodus of its most productive brokers. For years, Merrill Lynch’s logo of a bull was the premiere brand in the financial services industry. But with brokers leaving Merrill Lynch to go to other broker-dealers or to set up independent shops, that brand is likely to suffer.
As detailed by Louise Story in The New York Times, brokers have been caught in the middle of the credit squeeze and stock market downturn. As they comfort their nervous clients, they find themselves having to explain write-downs, losses, lay-offs, and capital infusions that they had nothing to do with. Additionally, because some of their income was paid in company stock, their own net worths have dropped along with that of the company stock.
For example, David B. Armstrong was, for many years, a proud Merrill Lynch broker in Virginia, and the Merrill name helped him to gain clients. But he struck out on his own in May, so that he would no longer have to explain how Merrill traders far from his office in Virginia made investments that undermined the firm. Mr. Armstrong said, “I will never have to worry about another person in my firm making bad business decisions that can put the entire business in jeopardy.”
Brokers have become more important to the bottom lines of brokerage firms like Merrill Lynch and Citigroup, which are increasingly reliant on their wealth management businesses to provide stable earnings. Merrill brokers were notified last week of the terms of Bank of America’s retention plan. Top earners would receive cash grants equaling up to 100% of their recent annual production for Merrill, and they would be allowed to keep the money if they stay at Bank of America for seven years. Other brokers, however, would receive far less, ranging from 10% to 20% of their production depending on their length of service and other factors. Many observers doubt that these offers will be sufficient to keep many of the brokers because Merrill’s competitors are offering even more attractive packages.
According to Jane Wells of CNBC.com, high-flying producers bringing in at least $1.75 million in annual revenues would most likely qualify for the top-level retention package. Brokers not in that group will make much less. A financial advisor producing $700,000 in revenue would be offered $175,000 in cash over seven years and a 25% growth bonus over three years. That same producer could get a lot more by defecting to a competitor – around $850,000 in cash on a nine year deal plus another $700,000 or so back-end bonuses after one or two years.
Mr. Armstrong, the former Merrill broker in Virginia, is hearing not only from old clients but from old colleagues as well. He has been meeting once a week with brokers in the area who are thinking of going independent and is encouraging them to follow the model that he used.
Another incentive for Merrill Lynch brokers to leave is that at Merrill they were permitted, under the 2004 Protocol for Broker Recruiting agreement, to take clients with them if they moved to another without being sued as long as they abide by certain rules. Merrill Lynch was one of the Protocol’s founding firms; Bank of America, however, is not a party to the Protocol. Once the acquisition of Merrill is final, brokers who leave Bank of America may risk being sued if they solicit clients to go with them.
These recent developments may herald a new career path for many Merrill brokers.
Defecting brokers should always be careful to protect themselves. Once a broker decides to leave he or she may find themselves the object of unwarranted legal actions or threats of legal action. It is important to know how to avoid breaching any obligation owed to Merrill and how to tell bogus threats from real ones.
Even before any dispute arises, documents relating to the broker’s employment may be critical and should be preserved. The broker should keep a copy of all documents relating to his or her employment status, including offer letters, employment contracts, employee handbooks, codes of conduct, compliance manuals and bulletins, benefit plans, deferred compensation plans, stock options plans, restricted stock plans, performance appraisals, bonus awards, promissory notes, records of payments and/or forgiveness of promissory notes, letters, email communications, and memoranda. The broker should have a copy of every document that he or she has signed. The broker should also maintain all documents relating to any sales awards or distinctions Merrill has awarded.
There may be instances when a manager has made oral promises or representations to the broker. If the manager has not confirmed them in writing, then the broker should keep careful notes of such promises or representations.
These copies should be organized and filed in one place ? preferably at home ? so that the broker does not have to worry about grabbing a file when he or she decides to leave.
While a broker is certainly entitled to keep documents related to employment, the broker must be careful not to copy and take documents that contain trade secrets and/or proprietary information of the firm. Such an undertaking could lead to the firm bringing charges for improper conduct.
Unless a broker leaves at the end of the calendar or fiscal year, he or she may be denied a pro rata of any annual bonus. As all who work on Wall Street know, the year-end bonus is an essential and often a large part of the total compensation package. Brokers should know, however, that ex-employees have successfully sued their former employers in arbitration for the pro-rata portion of their bonus for a partial year of employment. Of course, each situation is unique, and any recovery will depend upon particular circumstances.
If the broker owes money to Merrill on a promissory note, Merrill will most likely demand repayment. Very few promissory notes have a provision that forgives the remainder of the note when there is a termination without cause. The broker must be ready to document all repayments made on the note and all amounts that have been forgiven by the firm. Similarly, the broker should document any defenses that he or she may have for avoiding repayment of such notes. Firms take a hard line in seeking to collect on such notes and the assistance of an attorney may become essential.
Page Perry is an Atlanta-based law firm years of experience representing brokers and brokerage firm employees in litigation and arbitration. The firm maintains an active practice in representing individuals in employment disputes with brokerage firms. The firm is currently involved in representing several brokers in such disputes. In the past year, the firm has won arbitration award for clients in employment disputes in the amounts of $1.7 and $3.9 million. For further information, please contact www.pageperry.com.