| NEW YORK
NEW YORK Dec 7 For brokerage firms, there's a
fine line between aggressively recruiting financial advisers and
raiding the competition - a difference that could cost millions
Philadelphia-based brokerage Janney Montgomery Scott was
awarded $2.4 million in early November after claiming its Salem,
Ohio, branch was raided by rival Hunter Associates Inc. Janney
alleged Hunter took "the entire branch management team, all
financial advisers, and all other key personnel" to open and
staff a new branch office.
Most broker raiding cases are handled in arbitration by the
Financial Industry Regulatory Authority, instead of lengthier,
more expensive court proceedings. So what constitutes a raid
isn't very clear as FINRA does not publish evidence presented in
arbitration and provides very little detail about how decisions
A raiding claim is typically made when a firm loses 30
percent to 40 percent of the production from a branch office in
one swoop or over a short period of time, said New Jersey-based
lawyer Tom Lewis, who works with brokers transitioning to new
firms. Production - the revenue generated from fees and
commission - is derived from a broker's client asset base.
Securities lawyers and headhunters expect more raiding
claims to emerge because competition for financial advisers has
reached a feverish level.
Brokerages are increasingly reliant on their wealth
management arms to bring in steady revenue and profit, turning
to star advisers to boost client assets. Replacing top money
makers - who manage at least $100 million - is not easy, so
firms act fast when advisers exit.
"Because money is tighter, they're not leaving anything on
the table," said Chicago-based securities attorney Andrew
Stoltmann, who said he expects to see more raiding cases over
the next year.
Raiding claims can slow the movement of top advisers because
some recruiters will bring over advisers in stages to minimize
risks for the hiring brokerage.
"If we have a whole group and we want to move them from one
firm to another, we might suggest two (advisers) move and then
one month later, another move," said New York-based financial
services recruiter Rich Schwarzkopf.
It's a strategy, although more cumbersome, that makes a
raiding claim harder to win.
"Firms often lose their will to fight," Schwarzkopf said.
There is no official tally of raiding claims, but industry
lawyers say they are more prevalent in the brokerage industry
than other Wall Street sectors. The brokerages of Morgan Stanley
, Wells Fargo & Co and Bank of America Corp
have all made raiding claims in the last year or so.
The compensation a firm seeks for poaching a group of
advisers is typically based on one year's production lost from
the departing team members, according to industry lawyers. In
some cases, the firm may also seek punitive damages.
John Finnerty, a professor of finance at Fordham University
who studies raiding cases, said his researchers observed awards
between $10,000 to $22 million, excluding punitive awards.
In Janney's case, the firm sought $3 million in compensatory
damages. In a statement to Reuters, Janney said the $2.4 million
award it received "affirms the just and equitable principles by
which (the) industry operates in recruiting from competitors. It
sends the message that a branch manager has a fiduciary
responsibility to his or her firm.
A call to the lawyers representing Hunter was not returned.
Two years ago, St. Petersburg, Florida-based Raymond James
Financial Inc was fined $12 million by an arbitration
panel that found the firm improperly poached advisers from
Wachovia Securities in 2007. Wachovia was bought a year later by
Wells Fargo. Raymond James later said it reached a confidential
settlement with Wells.
Smart recruiting sometimes can be viewed as raiding.
Recruiters typically talk to between 25 and 40 advisers every
month and it can take years to convince someone to jump ship.
When they do, the reason usually involves frustration with their
employer, making it more likely colleagues will leave, too.
"When you start to talk to groups of advisers, that's when
you get into problems," said Mark Albers, a former manager of
multiple branches at Merrill Lynch and Morgan Stanley. "But even
if you may have had 10 separate meetings, if all the advisers
decide to leave within a close time, it could potentially be
Finnerty, who also runs his own consulting firm, New
York-based Finnerty Economic Consulting LLC, said the
determination of a raid can be murky when there are multiple
adviser departures in question.
If the departure of a few advisers affects the working
environment of the office, thus prompting several more advisers
to leave - even to different firms - that could be considered a
raid, Finnerty added.