The dispute centered on Schwab’s accusations that Morgan Stanley had “poached” a group of financial consultants and other employees in California and in doing so had obtained confidential information.
The three-member FINRA panel, though, disagreed and asked Morgan Stanley to pay about $71,600 in sanctions in a decision it signed last Friday.
Experts point out that Schwab, which has a large retail branch network and is the largest custodian for RIAs, is not part of the broker protocol in which broker-dealers agree to certain terms when advisors switch firms. Namely, advisors are prohibited from talking to clients about their move until after it is wrapped up; they are, however, able to take client contact information with them.
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Industry expert Danny Sarch of Leitner Sarch Consultants in White Plains, New York, says that brokerage firms that aren’t part of the protocol can really “take offense” when advisors leave.
These firms may see client assets coming to advisors as business that “belongs to the firm.” That’s because clients are usually in the Schwab business model thanks to Schwab’s retail presence rather than the advisor at the branch, he explains.
The concept of ownership, that the client is in charge of where their money goes, is a bit of a joke, he adds.
“But regardless of whether or not a firm is in the protocol, if [its recruited advisors] are seen as taking client information to the new firm, the firm is going to have a problem,” Sarch explained, in an interview.
Schwab says that it “strongly disagrees with the panel’s decision.” The firm is “evaluating our legal options,” a spokesperson explained in a statement.
“The claims in this case were compelling, including instances of taking proprietary information, manufacturing evidence, and operating a steady raid on staff and clients resulting in significant damage to Schwab,” the company added.
In addition, the San Francisco-based brokerage firm explains that it sees the arbitration decision as “an anomaly, and will pursue an aggressive course of legal action should other similar situations occur.”
Schwab first raised its complaints against Morgan Stanley in 2012.