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Industry Spotlight > Broker Dealers

Two Faces of Wall Street

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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.”

“It only takes one employee or former employee to bring a class-action lawsuit on behalf of the others,” says attorney Dale Hudson, counsel in the labor and employment practice of Nixon Peabody, LLC, in Los Angeles and Orange County, California. “It’s one thing to file a lawsuit against your company; it’s another to fill out a form,” and opt-in to a class that’s already been filed. “At that point it would take a pretty strong-willed person to say ‘I don’t want another $30,000.’ “

For all the headlines and large sums of money, the reps get a rather meager cut after law firms get their fees. Class action lawsuits are quite lucrative for plaintiffs’ attorneys; typically, the Thierman Law Firm’s fees range from “33.33% to 40%,” according to the company’s Web site, but Thierman says the judge ultimately determines the fees. In the Ninth Circuit Court (California) cases, they are typically 25%, and he says that some 12 to 15 law firms share those legal fees. Of the $98 million Citigroup Smith Barney settlement, that’s $24.5 million to legal fees, or an average $1.6 million for each of the 15 law firms. Remember the reps? There are reportedly 20,000 of them in the Smith Barney class; the average award per rep could be about $3,675, though the individual rep’s actual amount would vary according to length of time employed at the broker/dealer.

“The industry workaround, where this is heading,” says Thierman, “is a very, very, big increase in base salary, and commissions on top of that.” Stay tuned.–Kathleen M. McBride

For more detail on the legal issues and the players involved in this dispute, go to “Web Extras” at


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