Tag Archive for: Bank

The Friday Night FRB Massacre

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First Republic advisors have been baffled for an entire month, held in the dark since JPMorgan Chase acquired the firm. Advisors were told very little about the new platform, what the retention deals may be and who is eligible (or not), the payouts on banking and traditional wealth management, and the terms of their employment contracts. It is shocking this comes from one of the biggest and most powerful firms in the US; disclosure of contract terms was only veiled last Friday evening before the Memorial Day holiday, requiring signing a mere 10 days later. Now we understand why they waited so long.

As one seasoned professional stated, “this is one of the most nefarious and bad faith gestures from a firm that is expected to be top notch.” One cannot help but view this as unimaginable that JPMorgan Chase wouldn’t be more embracing for the new FRB advisors that have gone through such a spin cycle to land finally home at JPMC. To boot, advisors still haven’t been shown the entirety of the new platform, complete with all the bells and whistles that come with JPMC’s offerings, renowned brand name, and power.

What to make of this and why was there so much to hide? It seems this is by design as advisors patiently waited without any real news, clients too became passive, making it more and more difficult to potentially transition out of the firm. Advisors remained hopeful for the best, that the rumors about JPMC would not come true, that “it would be different this time,” and FRB advisors would be paid handsomely for their great businesses and unique culture. All of this came crashing to an unsavory new reality.

Roger Gershman of The Gershman Group who has had his finger to the pulse regarding First Republic advisors says, “there is a good reason why JPM didn’t open the kimono because they didn’t want to frighten advisors. As also predicted, JPM will do anything to protect their investment of the FRB clients they purchased.”  To be clear, whether for the next decade or after advisors retire, client relationships are those of the firm. In such deals, acquiring firms don’t feel they owe advisors much anything when a firm is in receivership or bankruptcy. In fact, they feel they are doing advisors and clients a favor to have a stable home to land. Below are some tough realizations offered FRB advisors now at JPMC:

  • One-year non-solicitation clause. This clause proves the notion that JPMC legally purchased all the assets of FRB including every single client of the firm whether brought to the firm from a previous competitor or acquired while at FRB. In addition, they also own every advisor, their cash flow, and heavy penalties are levied if the team leaves under this non-solicitation clause. It is written clearly that it is their right to protect this investment and any violation is cause for lawsuit, and a temporary restraining order from conducting any business with your clients.
  • Firing for cause. Listed are 11 broad terms of potential infractions that could lead to immediate dismissal. Do not underestimate how serious a large bureaucratic institution considers any minor violation of a single employee which can, in a moment’s notice, destroy any single advisor’s livelihood. Surveillance is a key mechanism to control behavior of 250,000 employees.
  • Banking referrals. Not listed in the contract, but private banking referrals stick at roughly 20-25%. These referrals originated and were property of FRB’s but, once again, now firmly the property of JPMC, and the firm will protect this investment given any future departure from the firm. Even at 25%, the firm will hold the future right to reduce this payout and take away any banking referral at any time. Lastly, it is widely assumed that any future meaningful banking referrals will not be offered by JPMC as most every referral is offered to the salary/bonus private bankers.

Consider those advisors who chose to leave the FRB to JPMC before the acquisition.

  • No non-solicitation clause. Every client, whether brought to the firm from FRB or brought to the firm from a previous bank such as Merrill or Morgan are the sole property of the advisor. This is standard practice, and there are even some firms who write into their contracts that if they ever leave the firm, no employee is allowed to solicit those clients if the advisor departs.
  • Banking referrals. These are considered property of the advisor and would hold at top GRID at about 50% or more.
    370%-450% economic packages. To stay competitive with the street, the firm still offers these deals to advisors/teams at competitive firms.
  • A 10-year contract versus 12-years. The average duration of contracts with major banks/brokerages is about 10 years.

Again, advisors have been strung along for the last month thinking that this acquisition would be different and that JPMC greatly valued the FRB culture, clientele, and process. The reality of the size of the acquisition can be put in perspective; JPMC has $4 trillion in assets compared to FRB’s $229 billion just months ago which, in the end after expecting to lose about 50-70% of advisors, assets have withered away to about $100-$125B due to attrition. In essence, a mere 2% of JPMC’s assets are due to FRB. It is conceivable that JPMC views FRB as insignificant in the scheme of things, paying a high price for the old contracts, and paying advisors upwards of a 50% payout compared to the 5-10% of  the costs associated with the salary/bonus advisors. However, the real jewel is the interest income which is expected to be about $85 billion which is several billion more than before.

JPMC evidently thinks little of advisors but certainly highly values your clients that they have now purchased. All the clients you have spent your time managing legally aren’t yours any longer. In signing this new contract with JPMC, you are effectively devaluing your business if you ever consider a future move under the weight of the firm’s draconian restrictions. Trust that all acquiring firms heavily discount books today from other private banks with similar clauses from Goldman Sachs, Citi Group, and other private banks. In fact, the average JPMorgan private banker moves 50% or less of their clients.

A quick assessment must be made in consideration of the valuation of an advisory practice if the terms of the contract are so harsh that it simply isn’t best for the advisor and clients. It is best to do this swiftly, seeking outside advice and of course legal counsel. Fighting the beast that is JPMC legally if you wanted to sell at any point in the future should be a large economic calculated risk. b

First Republic Advisors in the Age of Increased Surveillance at JPMC – WADU

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In recent times, advisors at various large firms have been grappling with a significant rise in surveillance and compliance measures. These measures encompass the monitoring of every action taken by advisors. While firms have always kept tabs on emails, phone communications, and office activities, the current level of surveillance represents a new frontier. This transition is particularly evident for First Republic advisors who find themselves at JPMorgan Chase & CO (JPMC), where they are experiencing a marked shift from a culture of freedom to one characterized by hawkish regulation and pervasive surveillance. For entrepreneurial-minded First Republic advisors, who joined a boutique firm for the autonomy it offered and the positive impact on their business and client experience, this sudden change can be jarring and worrisome.

In addition to monitoring employee’s personal cell phones – pictures, emails, calendars, and more most big firms are reportedly doing, it has come to light that JPMC employs an extensive surveillance program called “WADU” (Workforce Activity Data Utility). WADU utilizes advanced AI and machine learning to monitor nearly every aspect of an employee’s activities, both inside and outside the office. High-definition audio-visual security cameras are scattered throughout the premises and can collect data even when employees log into JPMC systems from home. This includes monitoring facial expressions, non-verbal cues, personal belongings visible in the background during remote logins, mouse clicks, typed words, phone calls, and more. All the collected data is instantly compiled into profiles accessible to management at any time, and alerts are triggered based on pre-programmed “concerns.” Zoom call durations, badge swipes, and movements within the office are also recorded. If JPMC discovers violations either on personal cell phones or through WADU, they’re fired. 

We sought the insights of Roger Gershman, who represents many First Republic advisors, to shed light on this matter. Gershman commented, “First Republic advisors are in for a significant culture shock as they transition from a boutique firm to a large bank. Adjusting from an entrepreneurial environment to a bureaucratic one won’t be easy. Moreover, the reports we’re hearing about the inner workings of JPMC’s surveillance system might prove uncomfortably invasive for free-spirited FRB advisors to endure.”

JPMC has also stated that employees that are director level and above must be in the office five days a week no matter if performance is demonstratively better from home. The in-office mandate poses a significant challenge for FRB advisors who were previously free to determine their most effective work methods and locations. The mood inside JPMC is dire. Employees express deep concerns, often using phrases like “Big Brother” and “1984” to describe the company. One employee remarked, “It has fostered paranoia, distrust, and, to be honest, a lack of respect. Many at JPMC feel like they’re just a number. Nothing more.” The situation has deteriorated to the point where employees have resorted to creative measures to outsmart the WADU system, such as taping over audio and video outlets and keeping their mouse in constant motion. It’s astonishing what lengths humans will go to in order to resist control.

For the free-spirited and entrepreneurial FRB advisor, this transition was not a choice but an enforced reality. Accepting a work environment that resembles a government institution rather than a business is deeply concerning. If these surveillance measures apply to advisors, one cannot help but wonder about the extent of client tracking. While we are accustomed to hearing about government surveillance, the creeping intrusion into our lives is now being witnessed in quasi-government firms like JPMC, which is the most regulated and closely intertwined with the government. The acquisition of JPMC has come with strings attached to the government, which has significantly altered the landscape. To say the least, this represents a far cry from the independence that advisors enjoyed at FRB. Consequently, many advisors are contemplating their options and exploring the possibility of joining a more boutique firm or pursuing full independence in their own RIA as a potential solution.

Advisors Are Abandoning Banks

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Numerous times in the past, banks such as Credit Suisse, Barclay’s, Deutsche Bank, Bear Stearns, Lehman Brothers, and now First Republic, have gotten themselves in trouble leaving advisor’s practices in a vulnerable position.The case historically has been one of a symbiotic relationship between the investment and private banking divisions which benefitted private clients, advisors, and the bank itself.

Now with First Republic, the value proposition is a shadow of itself for clients and advisors. History repeats itself, banks and brokerage houses need advisors more than advisors need them. The mass of advisors at banks and brokerage firms dislike the idea of returning to another big bank or even boutique platform and are deciding to take matters into their own hands by creating their own RIA’s.

First Republic was one of the fastest growing and most successful stories on Wall Street with an incredible culture; it is a shame it has come to this. At First Republic, the relationship between private banking and advisors was mutually beneficial as the bank gained massive deposits, offered discounted lending solutions, and in turn advisor practices fed the bank, and the bank fed leads to advisors to make the entire proposition sticky and highly valuable. No longer.

For First Republic advisors, the proposition to return to a big wire house that they potentially left in recent years isn’t desirable – to UBS, Morgan Stanley, RBC, Wells Fargo, Rockefeller, and even the risks associated with a smaller firm. Roger Gershman, who advises advisors on moves (www.thegershmangroup.com) says, “the idea of moving to another bank is something advisors can hardly fathom, they are looking for something different.” These firms are still linked to practices that put advisors and clients at risk. If an advisor considering a move, do you want to put your business at potential risk again and are you ok with a client acting on news they hear about the firm which could cause a run or need to change again? There is a viable home run solution to this is starting an independent RIA.

The upside is that for the most part, advisor’s businesses are fairly immune to the ups and downs of banks. Banks and brokerage firms need advisors more than advisors need either of them, and the bank’s value proposition continues to erode causing advisors to flee. Custodians are a commodity whether or not it is Schwab, Fidelity, or Pershing and all the products and services, trading, and reporting are ubiquitous.

Gershman says, “there are three major 1099 large banking platforms where you can establish your own RIA – Raymond James, Ameriprise, and Wells Fargo Finet. The biggest and most dominant platform is Wells Fargo’s First Clearing custodian.” First Clearing services 50 broker dealers and hundreds of RIA’s, one of those being Wells Fargo who is hungry to help advisors establish their own independent practice, allowing them access to all platform benefits without reference to Wells Fargo the company.

Advisors, imagine that you could have all the benefits of being at a multinational big bank platform with full access to all the products and services without being an employee – instead as an independent contractor. Advisors own 100% equity of their business while accessing all the resources of bank platforms, technology, support, with net operating income averaging 70% 1099 income. Just the same as big banks, independent platforms pay a significant amount to transition. There is also significant private equity interest to sell any amount of your new RIA at LTCG.

Advisors have list access to a multinational wire house platform, investment banking and capital markets research, integrated private banking resources, custom credit, and family office and trust services. Advisors also have state of the art technology services that mirror being in house at a big firm: wealth management platform trading, client interface, advisor workstation, operations, legal and compliance, reporting technology, and financial planning software.

Advisors: Don’t Trust the Bank!

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It wasn’t supposed to happen again. It happened again.

This week,15 years after the 2008 financial crisis, two banks failed within days of one another. This led to a massive stock retreat at First Republic Bank and a lack-of-confidence contagion that has spread to U.S. regional banks nationwide and, as of this writing, to Credit Suisse and other European banks. No one knows how far the tremors of this crisis will spread or when they will level off.

What does this mean for advisory practices in big banks — for instance the thousands of Merrill Lynch advisors under Bank of America? Nothing immediately catastrophic, to be sure. Unlike relatively small banks like First Republic, a behemoth like BoA is so heavily regulated that it must conform to the common interests of international and domestic regulators.

But Merrill advisors who saw their fiercely independent firm sold to BoA in ‘08 in order to survive may find a bitter irony in recent events. It’s never been a secret that the first priority of big banks is to protect and serve their shareholders and balance sheets — with advisors and the clients they serve coming in a distant second. During the extended bull market, the security that presumably too-big-to-fail institutions offered advisors and their clients may have seemed a reasonable trade-off.

But with the current deposit crisis and its grave consequences on banks’ balance sheets, advisors may wonder if they now have the worst of both worlds – neither independence nor security for themselves or their clients.

For decades, banks have paid advisors handsomely for placing clients’ cash into low-interest rate deposits. First Republic advisors, for example, received upwards of a 1.5% commission. Such advisor-facilitated deposits were then loaned out with massive position spreads and levels of risk. Such deposits fueled banks’ profitability as they borrowed money from their depositors at very low rates and then loaned to their clients for commercial and residential mortgages, with huge profitability.

But bank failures and runs on banks’ balance sheets are now reverberating through the biggest banks in the nation, including JPMorgan and Bank of America, as client deposits are moved into safer securities. The inevitable result is that costs associated with banks’ profitability will plummet as their borrowing costs skyrocket.

How, then, will this impact financial advisors? As banks scramble for profits, the last bastion of profitability is wealth management. Big bank practices can expect a number of issues, including lower commissions, a greater push into banking products and a greater control of assets being managed by advisors at these banks and brokerage firms.
The good news is that advisors have the power to protect their clients from conflict-ridden products and balance sheets and direct them into investments that will profit them. The moral of this ongoing story is: When it comes to your clients’ future and financial well-being, don’t trust the banks!