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Industry Spotlight > Broker Dealers

‘Our Reputation Stands on Its Own’

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Scenario 3: One of your reps suddenly leaves, taking several high-net-worth clients in the process and blasting your firm to several prominent publications. How do you mitigate reputational risk from one loudmouth? How do you respond with your other reps and their end clients?

Ralph Devito, The Investment Center, Division II:  I usually have the exact opposite happening. I had a rep leave the office having to sell out to another, larger RIA and change firms. The rep calls in tears because he really didn’t want to leave us. I’m kind of touched by it, but sad at the same time.

I don’t know if I would get into a war of words in the publication; it depends on what publication it is and how worthwhile I thought that would be. If I could call Jamie and get a rebuttal in your magazine, or on your website, I would probably do that.

But I think our reputation stands on its own with our reps. If I had to defend it to them maybe I would do it directly, but I’m not really sure that I would go public.

Eric Schwartz, Cambridge Investment Research, Division IV:  It doesn’t seem that the magazines, the five or six main ones, publish anything like that. You don’t want to get involved with one rep out of 8,000 reps at a broker-dealer saying that it was a terrible firm and they’d done them wrong. Most of those articles are about how wonderful the new firm is, not how bad the old one is.

If somebody comes in to look at Cambridge and they spend a significant percentage of their recruiting time discussing how bad their old firm was, and not just, “Well, they’re outdated. They’re an insurance company. They didn’t keep up with technology” — that’s just statement of fact, presumably, or their opinion — but when somebody starts saying how evil [their old firm was], I start wondering, “Well, in two years, is that what he’s going to be saying about us?”

They think they’re going to tell everybody about you, and they even threaten to do that sometimes, but fortunately I think people who have been around a little bit realize that if we’ve got a good reputation, if we’ve won Broker-Dealer of the Year, if they’ve known 20 of our reps and one guy goes off the chart, only a small percentage of people would listen to it.

If there’s factual incorrectness, maybe we would say something about it, but do you really want to stir that up when you have 90% of your other reps out there telling the world a different story?

Lon Dolber:  That’s not where our reputational risk issue has ever come from — an advisor badmouthing us that way. It’s come from law firms. We have law firms that on their website will put, “If you’re a customer of American Portfolios and you bought Medical Capital … ” or “ If you’re a customer of American Portfolios and you did this or you did that, give us a call because you may be entitled to blah, blah, blah, blah.” You know what we do? We file action against them. We are aggressive about that.

Green:  Against the law firms?

Dolber:  We go to the bar, and we tell them that it’s not right. We even had one law firm take credit. We had a situation where we had a fraud, and we handled it properly. Self-reported, usually a fidelity bond takes care of it. We did what we were supposed to do. There were just no lawyers involved.

We handled it as a responsible firm and this law firm pretended that they were the ones that helped out those clients.

Even if you had a regulatory fine, there are law firms that will say, “This firm has had a regulatory fine. If you lost money with this firm, give us a call.”

Schwartz:  Yes, we’ve seen that, too.

Dolber:  So we have a firm that looks for those firms that name us, and we go after them.

We had a reporter call us when private placement issues were going down with Medical Capital. We sold some of Medical Capital, not a lot. She was a young reporter. She came to see us to talk about it. We explained to her that it was a very small percentage of our business. It was not going to be a net-capital issue.

But the title when she came out with the thing is, “Long Island Firm Mired in the Muck of … .” She wrote a horrible article and never mentioned [that] we were able to prove that the clients needed to take those losses because they knew about the risk. Our paperwork was right, we won cases. She never printed that.

So what I did is I called the owner of the paper. I went to the editor first and said, “You had a responsibility to teach that person the right way. I’m not even mad at her. In fact, I’m inviting her back in so I can talk with her, but you are the one that should have looked at that article and asked her more questions about how she wrote it.” That’s how I handled it, but that was only one time that happened.

Schwartz:  In the end your reputation is based on your body of work for 10 or 20 or 30 years, and fortunately, one thing usually doesn’t do you in. Obviously, when you get in like AIG was at one time, or anything related to Medical Capital where you’re in there every week for years, it’s going to be ugly.

The single events, they’re ugly, but you just walk on by. We had a rep — this was 15, 20 years ago — who was churning mutual-fund accounts. When we looked into it he was churning them at his prior broker-dealer. The total amount of money was relatively modest. While he was with our firm he had cost clients about $50,000.

That’s modest in the context of even — forget Bernie Madoff, but a normal Ponzi scheme. We actually made this beautiful chart up of all the stuff [he had done] and even got some of the stuff from before he was with us. Fired him, sent it all to FINRA, and FINRA didn’t take any action against him. I guess because it was too small.

It was so blatantly obvious. It was, like, these eight widows, boom, boom, boom, boom. [FINRA] didn’t do anything. So he files a suit against us for defamation of character and unlawful termination and all that kind of stuff. After $40,000 in legal fees we paid him $25,000 to go away because it was going to be another $40,000 just to get it all to the end.

This was not a reputational issue, but reputational issues are also about your soul. You just feel like you’ve been dirtied by somebody saying that you’re an evil firm, that you harmed his dying wife or ‘you put so much stress on the family because you fired me.’

These things affect you on multiple levels. Sometimes you just have to stand up and walk away, and not fight that battle. You want to focus on making the world a better place, not just letting your ego get involved.

Dolber:  Too bad there wasn’t a safe harbor, though, with the thing you were bringing up about the brokers that move from firm to firm. Firms don’t often tell the other firm because they’re worried about what they’ll say, because they could get sued.

The one fraud that we had, that broker defrauded the firm he came from. Then he brought credentials to us that looked real but they weren’t real. We never knew and nobody was telling us because there’s no safe harbor. Firms seem to be very careful about saying something negative about an advisor for fear that they could get sued.

Schwartz:  We’ve been sued a couple of times about it, when you actually put down what’s going on. We know there are certain firms I won’t identify here that are being very careful about what they say about people.

So when we hear somebody coming quickly from that firm, even if they’re a million-dollar producer, we generally won’t take them because we know there’s probably something else going on.

It’s interesting, just like there’s a tendency for juries to feel sorry for the 78-year-old man on a respirator and a wheelchair, the arbitrators are more willing to see the broker-dealer as the big evil corporation and the poor advisor as the one that was done wrong.

Anybody in the industry with a little background, even if they weren’t with a broker-dealer, if you looked at that case, you’d go, “Of course the rep can’t do that. That’s just not right.” But the cases don’t always go that way because in many cases, it’s a question of the deep pockets.

Everybody’s comfortable taking money from an insurance company because they have an infinite amount of money. In the same way, to some degree, the price of success is that sometimes your reputation, your pocketbook or just your ego — you have to be able to walk away from some of these things.

David Stringer, Prosepera Financial, Division I:  Let me squeeze a comment in here. One of the things we’re very proactive on the front end about is who we let in the house, so fortunately, we’ve not had this experience.

But to your point, Eric, when we find someone in the interview process and they have nothing kind to say about their former employers, that to me is somebody who is somewhere down the line going to turn on us.

On the back side, we would take the high road. This is a very personal business to us. I’ve dedicated 25 years of my life to this business, so it would be very personal. [Privately], we’d probably scream and holler and wring our hands and be very angry about it, but publicly we’d take the high road.

If we’ve had some problem that they’re exploiting out in the press and it was truly our problem, we’d deal with it internally. We would talk with our advisor base and own it. We’ve done our part. We try to live by these core values that we establish and make an example of ourselves about living by those core values.


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