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Practice Management > Building Your Business

A Summer of Broker-Dealer Discontent

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The Employee Advisor is a new monthly column from Research on Wealth Editor-in-Chief Janet Levaux addressing issues at wirehouses and regional BDs. 

From fines to financial pressure and recruiting woes, employee-advisor firms — including the four wirehouses and other broker-dealers with large numbers of non-independent reps — are facing significant challenges this summer. To cope, many are turning to technology in the hopes that this will at least help them grow their respective wealth businesses as they grapple with a myriad of complex (and expensive) issues.

Got Cash?

Investor clients of wirehouse broker-dealers and other firms think cash in their accounts is safe, even in times of financial upheaval. But the Securities and Exchange Commission found that not to be the case, after whistleblowers came forward with critical information.

The SEC is now looking into how cash is managed at a number of broker-dealers after recently reaching an agreement with Merrill Lynch, which is set to pay $415 million and admit wrongdoing in the abuse of customer cash used to generate profits for the firm, and for its failure to safeguard customer securities from creditors’ claims. The compliance rule specifically broken by Merrill, regulators say, is Rule 15(c)3-3, known as the Customer Protection Rule, and BDs have until Nov. 1 to self-report any non-compliance.

“After the global financial crisis, the importance of protecting customers’ assets from misuse or insolvency cannot be overstated. This case will serve as a cautionary tale for other financial institutions about how quickly little mistakes, breakdowns in judgment and old-fashioned greed can snowball into expensive front-page scandals,” said Jordan Thomas of the law firm Labaton Sucharow in a statement.

Instead of putting customer cash into a reserve account, Merrill Lynch used it for “complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account” while financing its own trading activities from 2009 to 2012, according to the SEC. If Merrill Lynch had gone under during the financial crisis, the regulatory group said, clients would have been exposed to “a massive shortfall” in the reserve account.

“This is by far the largest customer protection settlement in SEC history, and the severity of the misconduct is much more significant than prior cases,” said Andrew Ceresney, director of the SEC’s Enforcement Division, during a recent press conference.

Furthermore, Merrill violated the Customer Protection Rule by not holding client securities that had been fully paid for in lien-free accounts and not shielding the securities from claims by third parties during and after the financial crisis, the SEC said. “Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities,” the agency said in a statement.

For its part, Merrill Lynch said in a statement: “While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes. The issues related to our procedures and controls have been corrected.”

In addition, the SEC said Merrill violated an SEC rule by impeding employees from voluntarily providing information to the regulator in its severance contracts.

Whither European Banks in the US?

Even before Brexit, banks in Europe have been under stress, with many selling their U.S. wealth-management operations, such as Deutsche Bank, Barclays and Credit Suisse. Raymond James, for instance, is buying Deutsche Bank’s U.S. private client unit (and renaming it Alex. Brown).

Stifel Financial agreed to purchase Barclay’s U.S. wealth management and investment units last year, while Wells Fargo struck a deal to recruit Credit Suisse’s U.S. private bankers. Morgan Stanley reportedly made a similar arrangement with Credit Suisse regarding its Latin American-focused private bankers.

European banks are dealing with negative interest rates and the associated drop in their share prices, while facing stringent capital requirements, other regulatory pressures and related strategic decisions, said Alois Pirker, research director of the Aite Group, in an interview. He had been cited in a New York Post article as saying UBS could move to sell its U.S. wealth business.

“Rumors about UBS wanting to sell their U.S. wealth management unit have been out there for years, but what’s probably revived them now is the fact that the firm is the scaling back its advisor recruiting efforts,” said New York-based executive search consultant Mark Elzweig in an interview.

UBS insists this speculation is unfounded. “UBS [Wealth Management Americas] is not for sale,” the company said in a statement in June. “Our wealth management franchise is at the core of our strategy, and we are uniquely positioned in the U.S. to succeed. Our WMA business makes up over half of the invested assets in the world’s largest and only truly global wealth manager.”

As Pirker pointed out, “Very rarely will firms put [it] officially out there” that they are selling a business. “So I would say the conversation does make sense: Should they own it or not?” The gossip came about two weeks after UBS said that it plans to raise pay for its top advisors, support retention and reduce advisor recruiting by 40%.

“Do you really want to own a retail brokerage in the U.S. or not? That’s the big question,” the analyst explained. “So far, they have stuck with the strategy, and over the past 15 years or so have showed a lot of staying power — including going through two [financial] crises.”

Today, there is “no indication they will sell it,” he added. However, there are certain trends affecting the industry — namely regulation — “that could make the possibility [of a sale] change.”

Plus, the financial pressure on UBS Group AG to cut costs is intensifying. In early July, it imposed a partial hiring freeze on wealth staff (not advisors) outside the U.S., Bloomberg reported. This move came after its first-quarter profits fell more than 60%.

Poaching Problems

JPMorgan Chase has been pushing the limits of the 2004 Protocol for Broker Recruiting, which seeks to minimize litigation when advisors switch firms. The firm is one of about 1,400 broker-dealers that is increasingly claiming exceptions to the rules, according to a Bloomberg report, while also stating that some of its own employees cannot be touched.

JPMorgan seems to be saying that its 2,000-plus private bankers are not covered by the agreement, while its 450 advisors (brought over from Bear Stearns) who earn fees and commissions are. (Rival Merrill Lynch argues that advisors who build their own practices are part of the protocol, but those whose practices come from company leads are not.)

Recently, arbitrators ruled that three advisors who left JPMorgan had not taken proprietary information without authorization and that JPMorgan had falsely changed the advisors’ records, thus defaming them. JPMorgan was ordered to expunge their records.

While the decision of the arbitrators was favorable for these three reps, employee advisors leaving firms should consider JPMorgan’s latest actions as yet another indicator of just how protracted retribution and legal battles with broker-dealers can become.

Tech Talk

Large institutions offering wealth management and related financial services are gobbling up smaller firms and setting up partnerships at a frenetic pace to improve how they analyze and manage portfolios.

UBS, for instance, is working with SigFig to roll out more financial technology to its roughly 7,000 advisors in the Americas and their clients. Plans include integrating information on assets held outside UBS onto one platform. (UBS also is making an equity investment in SigFig, and the two firms are forming an Advisor Technology Research and Innovation Lab as a forum for advisors and others.)

Meanwhile, firms continue to emphasize their own tech developments as well, including Wells Fargo. The wirehouse just rolled out Client Dashboard, a practice-management tool to consolidate different applications and information for its roughly 15,000 advisors. The technology can be used on both desktop and mobile computers.

“It brings everything onto one page, so all the client information is at the advisors’ fingertips,” said Warren Terry, managing director of FA Platform, Innovation & Strategy for Wells Fargo Advisors, in an interview. “We want to give our advisors as much up-front information about a client as possible.”

Client Dashboard is the latest tech tool introduced by Wells Fargo, following other programs such as Envision for investment planning, the Smart2Go mobile app and its Income Center for retirement planning. It brings together household information, account details and more.

Advisor Vaughan Scott of Axiom Financial Strategies Group in New Albany, Indiana, said he has worked with several different platforms at rival firms. “I’ve been through significant [technology] transitions like this, and this is notable for how smooth and seamless it has been,” he explained in an interview. “It’s really a huge benefit to our team in a lot of ways. It’s amazing to me just how [well-thought-out] it was.”

— Read What Financial Firms Can Learn From Fitness Trackers on ThinkAdvisor. 


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