Two Faces of Wall Street

People who work on Wall Street in “financial professional” capacities, that is, as registered representatives, investment advisors, investment bankers, analysts, or traders realize that they will have to work long hours over the course of their careers. The work they do requires specialization and often licenses or registrations with the SEC or NASD. Few professionals expect to work a 40-hour week on Wall Street.

So it was surprising to see the extent of rep participation in class-action lawsuits over “broker overtime,” and the astounding settlements that have been awarded. Citigroup’s Smith Barney settled an overtime and unreimbursed expense class-action suit in May for $98 million, which, according to a BNA Employment and Labor Law report, covers 20,000 advisors, or more, in only three states: New Jersey, New York, and California. Last February, UBS said it would pay $89 million to some 25,000 U.S. advisors. Why would brokers want to be treated as clock-punching workers, and why are broker/ dealers settling instead of fighting the suits? On the distribution side of Wall Street, whatever names they use to describe what they do, especially in these days of presumably less transaction-oriented and more client-centric, open architecture, and intensely regulated environment, these professional workers are not selling shoes–not that there’s anything wrong with that–but this is more than simple sales job.

At first glance it is hard to fathom how this happened. On the other hand, many reps who have become part of the classes are angry less about overtime and more about firms’ deductions–for trade errors, support staff, office overhead, or registrations–from their commission compensation. “It’s not the overtime,” according to labor and employment lawyer Mark Thierman, founder of the Thierman Law Firm in Reno, who initiated the first of this type of class-action suit against Merrill Lynch; it was settled last August for $37 million. “Reps are buying into this because they don’t want the deductions.” It’s easy to see how the deductions for all of those things might make a rep feel undervalued and underserved, “there’s as much liability in the deductions as there is in the overtime–those are huge deductions,” Thierman argues.

When you look at the difference between the gross production of the average rep and their compensation, it all becomes clearer. In the Securities Industry Association’s Report on Production and Earnings of Registered Representatives–2005, average gross production from commissions and fees (for 2004) was $418,003, but the average rep’s earnings were $174,105, according to SIA spokesman Travis Larson. That’s a 58.4% haircut for the rep. (See table below for average production by years in the industry.)

Haircuts like that are one reason reps from large firms tend to migrate to independent broker/dealers, where they are not employees but independent contractors and payouts are traditionally much higher. The impact of these suits is “not a huge problem in our part of the industry,” says John Poff, president and CEO of Mutual Service Corporation and current chair of the Financial Services Institute. Reps move rather frequently during their careers, he says, and “in the majority of cases in these suits I think you would find that these people are no longer involved with the firm–they’re suing their former employer.”