Opinion

MSSB FAs' Lawsuit Threat Just Wishful Thinking

September 20, 2012

Mark Elzweig is president and founder of the executive search firm Mark Elzweig Company.

A group of Morgan Stanley Smith Barney advisors are threatening to bolt the wirehouse and take their retention bonuses with them. Or, at least, that is what they would like to do. The squabble, which includes the threat of a lawsuit, is yet another outcome of the contentious Morgan Stanley Smith Barney wealth management merger. As part of that deal, Morgan Stanley recently scrapped the old Smith Barney technology and replaced it with its much-ballyhooed 3D platform. The system, however, is slow, not as user-friendly as the old Smith Barney system and error-prone, according to advisors at the firm. They complain of bounced checks and botched account statements among many other issues. Is the 3D dud reason enough for the advisors to keep the unvested portions of the retention awards granted in January 2010? The awards range from 30% to 75% of gross production and require that advisors remain at the firm for a minimum of nine years. The advisors shot across James Gormans bow has received widespread publicity. Theres quite a buzz within the firm, and other Morgan Stanley advisors are considering signing on to their efforts to leave for presumably greener pastures. Yet just how successful is a lawsuit likely to be? In my view, its highly unlikely that this group of advisors will accomplish much.

First of all, well-crafted promissory notes, which are basically considered loans that advisors must pay back if they leave before the specified number of years, are enforceable. In recent years, broker-dealer firms have had a near-perfect record of defending them in court or in front of a regulatory panel. For example, Jonathan Benham, a former Morgan Stanley Smith Barney advisor, was forced to pay the brokerage about $1.1 million after a Financial Industry Regulatory Authority (Finra) panel ruled that he breached the terms of two promissory notes (as reported). That is just one well-publicized example among many. Further, some financial advisors may be unknowingly waiving their right to sue former employers when they sign on the dotted line of employment contracts (as reported). The routine of trying to flee a firm while keeping the signing bonus has been tried before after other mergers and, in the large majority of cases, failed to achieve the would-be breakaway brokers objectives. As a rule, arbitration panels are not sympathetic to advisors who claim that a firm has grievously damaged their businesses while their assets and production either hold steady or even increase. Second, theres the obvious fact that the wirehouse issued the retention awards just after the merger because everyone expected bumps in the road until the new joint firm comes together. What are the main takeaways? The conversion to the 3D platform was handled poorly. Despite the advance training offered by the firm, the new systems capabilities were overhyped and advisors werent properly prepared to handle a system that, in some areas, apparently didnt have the same capabilities as the old Smith Barney technology. For example, some advisors report that the new system provides clients with less flexibility in deciding when investment income is paid out and that some bond trade executions and account rebalancing take longer. In some cases, what used to take one click now takes three or four. Its understandable that so many advisors are vexed and aggravated. Those Morgan Stanley Smith Barney advisors who are not happy with their new firm are, of course, free to hit the bid elsewhere. They should, however, plan their exits knowing that theyll have to pay back the unvested portion of their retention awards. Fantasies of simply pocketing the awards and moving on are not realistic.

Mark Elzweig Company, Ltd. Executive Search Consultants T: 212-685-7070 EM: elzweig@elzweig.com