The Friday Night FRB Massacre

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