We have always been troubled by the practices of many national brokerage firms to entice successful financial advisors to join their ranks. From our perspective, these practices can lead to situations in which the advisor is deterred from subsequently leaving the firm without feeling financially punished. These incentive packages can lead to a disconnect between the best interests of the financial advisor and the best interests of their clients.
These incentives come in many forms, including payments tied to promissory notes, EFLs (Employee Forgivable Loans), deferred compensation, and other incentives. Collectively, we believe these incentives are bad for the integrity of the securities industry, bad for advisors in the long term, and, as a result, bad for investors.
With respect to the deferred compensation version of this practice, financial advisors have recently started to fight back. The legal tool used by these financial advisors to fight back is a federal law known as ERISA and the forum for seeking redress is FINRA arbitration. Meaning, advisors are now pursuing FINRA arbitration claims against their Broker/Dealers (or former Broker/Dealers) in FINRA arbitration based on claims that the Broker/Dealers deferred compensation programs are structured and operated in a way that violates federal law. To date, some—but not all—FINRA arbitration panels have ruled in favor of investment advisors with respect to violative deferred compensation plans. Specifically, financial advisors have had some success in asserting that their employers failed to treat them right in connection with deferred compensation plans based on an assertion that ERISA law applies to these plans and that these plans violate ERISA.
ERISA, a federal law that has been in place for 50 years, is an acronym for the Employee Retirement Income Security Act. It is designed to protect the rights of participants in plans and, as part of that, ERISA addresses benefit, funding, vesting, and accrual of benefit issues. Importantly, ERISA also establishes that the employer who manages and controls these funds are fiduciaries (and, importantly, was just expanded this year by a Department of Labor rule expanding who is deemed to be a fiduciary under ERISA). This law gives financial advisors who have been subject to ERISA law violations the right to pursue claims for benefits due to a breach of fiduciary duty. One of the issues in these cases is control, meaning who is in control of the deferred compensation dollars (i.e. the advisor or the firm).
Historically, the securities industry has largely viewed these deferred compensation plans as something financial advisors automatically forfeit if they leave the firm prior to a lengthy vesting period. This practice went largely unchallenged for years. However, as outlined above, recent cases brought by financial advisors focus in on control of deferred comp dollars and whether the advisor is deemed to be in control of the deferred compensation dollars. The ERISA violations in these types of cases involves vesting requirement set by the brokerage firms for a period longer than that allowed by ERISA.
From our perspective, the brokerage firms that engage in these aggressive deferred compensation practices are creating an inappropriate windfall for themselves. In other words, if a financial advisor leaves before the vesting of the deferred comp, then the broker dealer confiscates the advisor’s compensation that was already earned by the advisor.
These deferred compensation claims will likely start to come into play in cases in which a financial advisor leaves a firm with a balance due on an EFL or promissory note.
Although these incentives are appealing to financial advisors, we see them as an outdated practice that traps advisors and their clients at firms that no longer serve them and their client’s collective best interests. Nevertheless, it appears that some broker dealers intend to continue these practices and fight any challenges from financial advisors. We recommend that financial advisors avoid working with these firms and, if already employed at one of these firms, to fight back against these practices that are often not in the long-term best interest of advisors or investors.
Vernon Litigation is a financial dispute law firm based in Naples, Florida, that represents both investors and financial advisors nationwide in disputes against the financial industry. With respect to their financial advisor representation, Vernon Litigation only represents advisors in disputes against their current or previous employer (in deferred compensation, promissory note, and EFL disputes, as well as whistleblower, wrongful termination, and U5 employer defamation (as well as other defamation) claims).
If you are a financial advisor with a significant employment related claim or issue, give us a call (239-319-4434) to discuss your situation on a fully confidential basis or visit our webpage at https://www.vernonlitigation.com/naples-employment-litigation-attorney/financial-advisor-transition-litigation