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Trainee lawsuit could clip brokerages' ability to recoup costs

Mar 22, 2014 @ 12:01 am

By Mason Braswell

trainee, wells fargo, lawsuit, broker, fair labor standards act, merrill lynch, edward jones
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(Bloomberg News)

The ability of brokerage firms to recoup training costs from ex-employees who leave the firms early could be in jeopardy if a lawsuit filed last week on behalf of a former Wells Fargo Advisors trainee is successful.

Wells Fargo is seeking more than $50,000 from a former trainee, Erika Williams, after she resigned under duress last June, just a year into the five-year training program she began after joining the firm, according to her lawsuit.

In the suit, which was filed in U.S. District Court in the Northern District of Illinois, Ms. Williams claims that if she has to pay back the cost of training, Wells Fargo will have violated the federal minimum wage law since she was paid an annual salary of $45,000 — about $5,000 less than the training costs.

“Wells Fargo is unjustly enriched by these practices, as the firm received the benefits and services of the new [financial advisers] for wages below minimum wage,” the complaint said. “The practice also constitutes an unlawful kickback under the FLSA that leaves new [financial advisers] not earning minimum wage or overtime if they are forced to pay 'training costs.'”

(See who's joined and who's left Wells Fargo Advisors in the last month.)

The lawsuit, which seeks class action certification, is one of the first of its kind to challenge a long-standing practice at many of the industry's largest brokers, including Bank of America Merrill Lynch and Edward Jones.

“This is a novel approach,” said Marc Dobin, an attorney with the Dobin Law Group. “This is the first time someone has filed a lawsuit to see whether they're violating the Fair Labor Standards Act.”

A Wells Fargo spokesman, Anthony Mattera, declined to comment on the lawsuit because the case is pending.

(See also: Wells Fargo Advisors' head Mary Mack fills out her cabinet)

The agreements that broker trainees are required to sign are as old as many of the training programs themselves, Mr. Dobin said.

In recent years, as firms re-emphasize training, several former trainees have wound up in arbitration over disputes arising from training fee claims, Mr. Dobin said.

Only two arbitration awards involving claims for the recovery of training costs appeared each year from 2009 to 2011, according to an analysis by Securities Arbitration Commentator Inc., a securities award research firm. That jumped to 15 in 2012. Another seven cases went to arbitration in 2013.

All but two came from Wells Fargo and Merrill Lynch.

A spokeswoman for Merrill Lynch, Susan McCabe, declined to comment.

Most agreements require trainees to stay at a firm for the duration of the training program, which can run more than three years, unless they are fired.

Wells Fargo's training agreement is a five-year contract that values the training at $55,000, according to the complaint.

During the last four years, the amount that Wells Fargo can claim the adviser owes decreases at a set rate each month until it is fully amortized at the end of the four years, Mr. Mattera confirmed.

The goal is to prevent the firms from incurring losses from advisers who receive training and move to other firms. Edward Jones spokesman John Boul said that his firm requests that the adviser's new firm pay the training costs when a trainee leaves for a competitor.

“Edward Jones and Merrill Lynch and others out there doing training invest a lot of money in these people,” said Ron Edde, president and chief executive of the recruiting firm Millennium Career Advisors.

Trainee dropout is a common concern in an industry that averages around a 20% to 30% success rate, according to a study last year by Cerulli Associates. The success rate measures the number of employees who complete training and go on to become advisers.

“Very few make it that long,” said Danny Sarch, president of career consulting firm Leitner Sarch Consultants Ltd. “That's part of the catch.”

But Ms. Williams, who moved to J.P. Morgan Securities last July, according to Finra records, alleges that Wells Fargo sues even when the trainee is dismissed for failing to meet standards.

She resigned after the firm had made it impossible for her to continue working there, according to the suit. Ms. Williams is an African-American and is also part of another suit alleging that Wells Fargo places an unfair burden on minority advisers, who fail at a higher than normal rate, because they receive less support from the firm.

CONCERNS AMONG STUDENTS

Robert Ellis, an industry consultant who teaches a wealth management seminar at Ithaca College, said he has fielded concerns from students over the agreements.

“I tell them to go to the large firms that have the training programs,” said Mr. Ellis. “But they have to make sure they are committed to the duration whether the firm is or not.”

“I'm seeing it in a moral sense and not a legal sense,” said Mr. Ellis. “The onus is on the individual to succeed whereas the onus should be much more on the company to do all they can to help the person succeed.”

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