Reverse Churning Nonsense: Edward Jones Lawsuit Dismissed, But Plaintiff Lawyers Vow To Fight On

The entire concept of reverse churning continues to be a head scratcher for us. To quickly recap, first commission based accounts were bad (just ask Tom Buck) but now fee-based accounts are also considered bad and are being taken to the legal woodshed. Give us a second so that are heads can stop spinning.
A well-known ‘reverse churning’ lawsuit was dismissed last month on behalf of plaintiff lawyers claiming that customers at Edward Jones were forced into fee-based accounts when they were perfectly happy in their commission based ones. Thus the term ‘reverse churning’; as the fees associated with the new wrap accounts outpaced the commissions generated on the same accounts on an annual basis.
Per media reports:
“Customers accusing Edward D. Jones & Co. of generating hundreds of millions of dollars in a “reverse churning” scheme have refiled their complaint, following dismissal of their putative class-action lawsuit by a federal judge last month.

“The core argument that Jones shifted clients to fee-based accounts that are more costly than traditional brokerage accounts remains, but the refiled complaint has been modified to overcome Eastern District of California federal judge John Mendez’ objections on the law, said Ivy T. Ngo, one of the lead counsels for the plaintiffs.”

“Lawyers eliminated several Jones executives and asset management units as defendants, added allegations from former advisors about inadequate suitability assessments and changed the focus of the charges to the firm’s breach of fiduciary duty, she said.”

So the lawsuit lives and plaintiff attorneys are going to give it a second go. The nonsense of reverse churning lives and breathes and we will continue to talk about it for months to come. Strange happenings in the delta that brings together wealth management and the legal field. Strange indeed.

No Longer Protected; The Number Of Barron’s Advisors Fired In The Past Two Years Has Skyrocketed

Over the past few years the stories of Barron’s Top 100 advisors being fired has grown in a way that begs all manner of questions. Questions every bigger producer should be asking themselves and taking serious steps to protect their book, their career, and their reputation.

A few months ago another ‘advisor of scale’, Craig Findley, was fired from UBS. As the details leaked out he wasn’t fired for industry red lines such as unauthorized trading or fraud, but rather ‘outside activities, personal matters, and expense reporting’. Potential offenses which have largely been favorably interpreted on behalf of big producing advisors like Mr. Findley.

(**The latest on Craig Findley via media reports: “UBS explicitly said that the termination was not related to sales or client-related issues. But the U-5 language—including the use of “outside activities” rather than the more common termination cause of unauthorized “outside business activities”—suggests personnel and expense issues, said people familiar with compliance and legal notices who declined to be identified because they were not familiar with Findley’s case.”)

There is a narrative amongst the broker masses that believes that larger advisors increasingly have a target on their back. Wirehouses are particularly of interest as more big name advisors have been fired from those firms and made for splashy headlines. One wonders if that narrative has any merit to it, or is it simply an ‘us against the man’ mentality finding a cause to rally around?

Whether that narrative is real or perceived it still leaves us with a problem to solve. With sometimes billions in assets under management and multiple millions in annual revenue, advisors are brands that need to be protected.

Every manner of precautions need to be considered. Some suggestions that should be seriously considered are as such: personal legal counsel (the firms lawyers are NOT your lawyers or your friend), a compliance focused, salaried employee on your team, quarterly reviews of firm policy, annual off-site team meetings focused solely on client communications and how they match with firm policy, copious note taking, and any other measure that stays two steps ahead of your firms compliance and legal departments.

If you think one of those suggestions go too far…you are already at risk. This goes beyond personal integrity. You are protecting an asset that you’ve built over decades and may want to pass on as a legacy to your children. Should you be so careless as to leave it in the hands of an annual firm audit and firm paid compliance personnel? No, no you shouldn’t.

The reality today in wealth management is this, find a way to keep yourself uncomfortable and retain as much control of your business as you can. Be personally vigilant – it may save your career.

The Chilling Saga Of Tom Buck; An Ongoing Reminder To Legally ‘Gird Your Loins’

The Tom Buck saga has been an epic meltdown worth paying attention to for a little more than four years. Eventually culminating in a 40-month federal prison sentence for the once revered and Barron’s Top 100 ‘certified’ financial advisor.

A short little recap. Tom was the biggest Merrill Lynch retail advisor in Indiana for more than a decade. Merrill compliance completed an audit and something didn’t smell quite right. Tom was let go. But that wasn’t the end of the story.

Federal prosecutors in Indianapolis took a liking to the details of the case and pursued what they saw as fraud amongst other criminal activities such as not telling clients about alternative fee structures available to them. Federal prosecutors brought charges and indicted Tom.

Tom settled, monetarily, with financial regulatory agencies to the tune of better than $5MM bucks.

He decided to plead guilty to a few of the charges brought against him. And after several delays (and proof of certain facts that clients weren’t monetarily harmed in any way and actually made money under his commission based tutelage) He was sentenced to 40 months in federal prison.


Now, word on the street is that federal prosecutors in several surrounding states (Illinois, Michigan, Ohio, Missouri) are looking to make the same kind of splash by pursuing so-called ‘bad actors’ within the broker ranks.

Federal prosecutors offices are aware of the press this case garnered and the ease at which it was executed. And they likely believe there are many other advisors out there with a similar profile.

Again, chilling.

While you may not want to admit it to anyone out loud, or even at the next branch office party or wholesaler golf junket – Tom Buck is a troubling tale for brokers who came up doing things a certain, and legal, way. Used to be, if an advisor of scale cut a corner or two he’d get a slap on the hand, maybe a note in his file, and be told to clean things up. All while keeping the entire process in house. But now?

If this story didn’t scare you and reset your idea or ‘risk management’ as an advisor we suggest you reconsider. Please take note and beware – times have remarkably changed. It is time to gird your loins.

BofA Continues To Punk Merrill Brand; Commercial ‘Fades To Black’ Famous Merrill Logo

Maybe this was the plan all along, when a shotgun wedding occurred in 2009. Bank of America was given control of Merrill Lynch and its 90 year history as the preeminent wealth management brand in the United States, and has systematically marginalized its advisors, brand, reputation, and overall standing within the industry.

The latest Bank of America commercial, dubbed “A Single Defining Moment”. The commercial mentions ‘Merrill’, not Merrill Lynch and at the end of the commercial the Merrill Lynch logo is wiped out in favor of Bank of America’s logo in less than a second. The entire spot is a testament as to how the bank views Merrill Lynch and its advisors – a division of the bank with the mandate to move as much product as possible.

It still is remarkable that the name has essentially been shortened to just ‘Merrill’ by the bank. No longer Merrill Lynch as its been known and revered for decades and decades. Just Merrill. Like the name of a legacy intern fresh out of a private university starting at a branch in Connecticut. Seriously.

The constant leak of advisors from Merrill that are of scale is the only story that matters. Irrespective of name changes and cultural appropriation – who leaves and the assets they take with them is what matters. And that continues unabated. No matter what additional headcount via bank branches or Merrill Edge add up to, the biggest advisors at Merrill continue to move to less constrictive pastures.

Still, the commercial is striking and revealing unto itself. Emblematic in many ways. The thundering herd is no longer what it used to be, no longer thundering, and no longer the largest herd on the street. Bank of America has hollowed it out, and not looking back.

Management Risk Assessment: Branch And Regional Management Has Become Akin To ‘Walking The Plank’

A couple of headlines have crossed the wires as of late noting continued shifts in branch management as well as regional management structures. Moving actual geographies as well as position shifts and title changes.
One question we’ve pondered, does anyone actually covet branch management positions anymore? Given the regulatory and compliance risk, as well as ever shrinking pay packages, you’d think most would run from the specter of increased decision making yet increased risk?
As a manager you could just as well be fired for someone else’s mistake as opposed to your own. Is that really worth an extra 100k a year as a producing manager? Probably not.
And what about branch and regional managers that aren’t producers? Talk about a career path fraught with risk. While their value is obvious in larger metro areas, the smaller city management career path is scary.
Take a look at an example at Morgan Stanley (again):

“The shift continues a whirlwind of branch management changes in the wirehouse’s south Florida market, where broker exits have been accelerating, according to headhunters.”“Byrnes did not return a call for comment on his new role. His remit will be in central Pennsylvania, a Morgan Stanley spokeswoman confirmed.”

“His Florida post will be filled on an interim basis by Michael Higgins, Morgan Stanley’s North Palm Beach/Boca East manager, the sources said. The complex also includes offices in West Palm Beach, Stuart, Melbourne, Palm Beach Gardens and Vero Beach.”

“Byrnes had been running the complex since January 2017, after he stepped down from overseeing the Southeast region as part of a reorganization.”

In other words, job security is minimal, and you can be picked up and shipped off to a new geography at a moments notice. And be careful, that new hire advisor could slip up and cost you your job. Management in the world of financial advisors is a risky, risky game.

UBS Recruiting Reax: Massive Legacy Merrill Lynch PWM Team Joins Swiss Ranks In North Carolina

UBS continues to work through several missteps over the past few months. Those issues have been well covered on this site and in other industry publications. With that backdrop UBS pulled off a stunner today – landing the biggest Merrill Lynch PWM team in North Carolina.

Wickham Cash Partners, as they’ve been known for decades at Merrill Lynch, claims $16.7M in annual revenue and nearly $11B in client assets. Those numbers should hold up exceptionally well at the end of the year when looking back at the biggest moves in the industry. It wouldn’t surprise us if it holds up as the biggest move in the industry all year; kudos to UBS for landing a 50 year legacy founding an advisor and team.

Per media reports:

“R. Mitchell Wickham and Gregory M. Cash joined UBS with 15 other advisors and support staff, UBS said in a press release.”

“The team, which had included founder Charles L. Wickham, Mitchell’s father, had been overseeing $10.8 billion in client assets, according to a person at UBS familiar with their practice, who also provided their production number. The elder Wickham will remain until August at Merrill, where he is participating in its book-transition program.”

“More than 80% of their assets and $6 million of their revenue came from clients of Merrill’s “money manager services” business, which provides custody and clearing for retail clients of family offices and money management firms, according to two other sources. The Wickham group began their search in May 2019 after Merrill, whose parent Bank of America is based in Charlotte, said it would close MMS, which is used by a very small number of Merrill brokers, by the end of 2020.”

Well that seems just a bit odd? The teams founding partner is remaining at Merrill Lynch to finish off an asset transition program? To be fair, Charles is more than 80 years old, so we doubt he’s been serving clients on a full-time basis for a while. Clearly his son and partners manage the bulk of the stated assets here.

Selectively going after ‘teams of scale’ seems to be UBS’ recruiting objective in 2020. And Merrill remains ripe for the picking. Still, we expect both Merrill and UBS to be among the biggest net losers of advisors this year. Continued unrest in response to policy changes will send advisors elsewhere.

These type of headlines will be the norm this year, not the exception.

JP Morgan Whale Caught! First Republic Lands Biggest JPM Team In Florida

We told you to keep a sharp eye on this week and weekend. And we told you to be on the lookout for multiple J.P. Morgan Securities exits. Well, here you go.

First Republic just landed a monster team in Florida. Per media reports:

”Salvatore Tiano, who spent all one year of his 30-year career at J.P. Morgan Securities and its Bear, Stearns Securities predecessor, the team includes six advisors and four support staffers who work with $2.5 billion of client assets.”

”Mr. Tiano  ranked #2 on Forbes’ list of top Sunshine State advisors in 2019 (and #54 nationally), and works with many “dot-com era public executives.”

”The group, which was based at a J.P. Morgan office in Palm Beach, are the first wealth managers to join First Republic private bankers in its Jupiter, Fla., branch.”

The spicket has officially been turned on and the ‘outflow’ at JPMS is expected. Multiple recruiters believe that there will be significant attrition at the firm this year – and this move is a testament to that.

First Republic, in conversations with recruiters, is set to get slightly more aggressive in wooing some of the largest teams in the space this year. They will need all the aggressiveness they can muster with Morgan Stanley and Wells Fargo at full tilt on the trail once again.

Again, there are more moves to come and announcements to be made. Q1 is shaping up as an epic one.

Morgan Stanley Crushes Earnings Expectations; Wealth Management Outperforms, Profit Margin Pushes Past 27%

Morgan Stanley is moving today, and it has its wealth management division to thank. In two short years executives at the firm have pushed profit margins from roughly 20% in the division, to better than 27% – a number that most thought would take a couple more years to manufacture.

Now, the next profit margin goal has been set by James Gorman – 30%. And all of this as the firm returns to aggressively recruiting large advisors and advisor teams.

Via media reports:

“We delivered strong quarterly earnings across all of our businesses,” CEO James Gorman said in the release. “Firmwide revenues were over $10 billion for the fourth consecutive quarter, resulting in record full year revenues and net income. This consistent performance met all of our stated performance targets.”

Whether good or bad, Morgan Stanley is seen as the purest play in wealth management amongst advisors. It no longer competes with Merrill Lynch in a meaningful way as the ‘whimpering herd’ has been nurtured by Bank of America.

Advisor attrition has slowed based on the firms protocol exit strategy. It seems that the policy is working dramatically better at Morgan Stanley than UBS. And the recently announced comp grid adjustments seem far less obtrusive than those announced by UBS as well.

One manager we spoke to at the firm this AM said the following about the current state of attitudes amongst advisors: “I’d say it’s a 60/40 proposition. 60% are happy with the current trajectory of the firm, and 40% are lukewarm. Some still hold Smith Barney grudges and there isn’t much that can be done about that. But this is a place where the headline on your business card still is a net positive in attracting clients and assets. Most advisors get it.”

Morgan Stanley is in a generally good spot in relation to its wirehouse competition. Of course, that’s a category rife with long term issues, but for today they can bask in the glow of beating earnings expectations.

Prison Break: Advisor Gets 14 Year Sentence For Stealing Client Funds

Don’t do it. Should we really have to say it? Seems that we do. Don’t ever take a dime, or re-direct a dime, of client money outside the boundaries of rules and regulations. You will get caught. Just ask Steven Pagartanis.

Per media reports:

“In December, Steven Pagartanis pleaded guilty to conspiracy to commit mail and wire fraud stemming from an 18-year scheme in which he convinced more than a dozen clients — mostly older women — to invest in two publicly traded companies, only to launder the invested money through a series of shell companies and private accounts that he controlled.”

“Pagartanis used some of the money he collected to pay out promised returns to earlier clients in what authorities described as a Ponzi-like scheme.Other funds went to bankroll personal expenses, including massages, jewelry, clothing, airline tickets and cigars. He also channeled hundreds of thousands of dollars to his wife’s failing pet store, which was losing between $7,000 and $8,000 a month, according to a U.S. attorney’s sentencing memo.”

An 18 year scheme feels like a virtual lifetime. And for his victims it will affect them and their families for a lifetime – making the punishment fit the crime.

A word about firms that you may have never heard of, and their ability to police this type of activity. While we don’t want to paint one firm or another with too broad a brush – it is much more rare to hear about a story like this at Morgan Stanley or Raymond James.

If you haven’t heard of the firm that the offender is employed at, be very, very careful. Seems like common sense – but this stuff keeps happening.

That Didn’t Go So ‘Well’; Wells Fargo Loses 211 Net Brokers In Q4, Profit Plunges 63%

Looks like Wells Fargo could use a do over in their wealth management unit when it comes to the fourth quarter of 2019.

In fact, you can imagine that managers and executives in and around the wealth division couldn’t wait for the 2020 NYE ball to drop a couple weeks ago – cause 2019 was brutal.

Some numbers to digest:

  1. Wells Fargo lost a ‘net’ 211 advisors in the fourth quarter alone. That’s after pretty strong recruiting momentum in Q4. So the real number is probably closer to 300.
  2. In a raging bull market the wealth division’s profits took a beating – down 63% year over year.
  3. Expenses also soared, up 23% from the year ago period.
  4. Meanwhile, despite the three pain points above, this was Wells Fargo’s most successful recruiting year ever, based on head count and recruit metrics – average T12 and AUM.

The headlines will sting a little bit over the next week and may even slow some recruiting momentum that has been built at the firm. The pipeline at Wells Fargo, as we hear it from recruiters, is pretty robust. Offering the biggest deal on the street certainly is paying its dividends.

But the numbers above are a seriously deep hole to dig out of. 2020 needs to be a year of ‘quick wins’ on the recruiting trail, and headlines that don’t derail the fragile but recovering reputation of the firm.

A bottoming out of the internal metrics at Wells Fargo WMA should set everyone up for a rousing 2020 Q3 and Q4 though. Let’s see if they can properly take advantage of both deflated numbers and expectations.