On Advice

Wells Fargo, Morgan Stanley use contrary tactics to keep advisers

Wells is helping brokers transition to independence within the firm, while Morgan is taking them to court

Jan 25, 2018 @ 1:26 pm

By Bruce Kelly

Wells Fargo Advisors and Morgan Stanley are using extremely different tactics in the battle to hang onto their financial advisers.

Wells Fargo started the year by dangling a carrot at its 14,544 retail and wealth management advisers, while Morgan Stanley is waving the stick at its sales force, who number 15,712.

The contrast between the two could not be clearer.

Wells Fargo is getting ready to tell its brokers who are employees it will erase a hurdle for those looking to move to its independent contractor broker-dealer, called Wells Fargo Advisors Financial Network, or FiNet.

Wells Fargo's message? Stick around, Mr. Adviser, even though the bank who owns the retail brokerage business has been enmeshed in a number of embarrassing scandals the past year and a half. Forget about those troubles. Wells Fargo can still be a valuable partner and help boost the profitability of your business.

On the other hand, Morgan Stanley is making it far more difficult for its advisers to leave the firm. At the end of October, the wirehouse said it was dumping the protocol for broker recruiting, an agreement that made it easier for brokers to leave one firm and join another. At the time, Morgan Stanley advisers were told the firm would enforce client confidentiality and nonsolicitation agreements. Morgan Stanley signaled it could go to court and get a temporary restraining order against an adviser who left.

Now, Morgan Stanley is suing brokers who leave the firm, reviving an aggressive business practice last seen around the time George W. Bush and John Kerry were duking it out in the 2004 presidential election. Fourteen years is equal to several lifetimes ago in the securities industry.

Morgan Stanley's moral? Sit right down, Mr. Adviser. Your clients belong to us.

The firm "has gotten very aggressive in its pursuit of litigation," said James Heavey, a partner at Barton LLP. "It's been a couple months since Morgan Stanley left the protocol, and every adviser who leaves is a litmus test. If it can be aggressive, it serves as a deterrent factor against advisers who are thinking about leaving.

"I understand why Wells is giving advisers the ability to go to the independent platform," he said. "It gives advisers a little more breathing room or distance from the reputational harm Wells Fargo has been associated with the past year-and-a-half."

With the stock market continuing its roar to fresh record highs, the wealth management groups at large firms like Wells Fargo and Morgan Stanley reported record assets and fees, respectively, in 2017. Those results mask a serious problem at the large firms.

The four wirehouses — Wells and Morgan along with Merrill Lynch and UBS Wealth Management Americas — are facing a serious predicament; they are bleeding advisers and the clients' assets those advisers control. InvestmentNews data show that an increasing number of teams are leaving those four firms each year.

That undermines the potential for long-term growth and profitability at the wirehouses, particularly as their advisers are growing older by the day and more are retiring each year.

A scan of federal court filings shows that Morgan Stanley has filed at least four temporary restraining orders against former advisers over the past three months. Advisers, naturally, are deathly afraid of being sued. On Monday, Morgan Stanley filed a lawsuit in U.S. district court in Jacksonville, Fla., against a broker, Daniel Abel, who left with about $18 million in client assets to start his own wealth management firm.

Morgan Stanley's wealth management group counted at the end of last year $2.4 trillion in client assets. It seems odd to argue that the firm will suffer "irreparable harm" due to Mr. Abel, with his $18 million in assets, leaving, as the complaint alleges.

"Morgan Stanley expects all former employees to comply with their legal and contractual obligations to the firm," said spokeswoman Christine Jockle.

While Morgan Stanley is suing advisers, Wells Fargo's management is discussing cutting a two-year charge on compensation that it levies on employee advisers who move to FiNet, according to two sources familiar with the talks.

When employee advisers move to an independent broker-dealer, they see a higher payout — along with building equity in their own practice — that is offset by an increase in expenses for such costs as staffing and office space. Keeping those forces in mind, over time it can be more lucrative for some advisers to work as independent contractors instead of as employees.

Right now, Wells Fargo charges advisers who move to FiNet 15% of their compensation the first year and 10% the second, according to the sources, who asked not to be identified. Wells Fargo will waive that charge, dubbed a "toll" or "tax" by some in the industry, if the adviser commits to a two-to-three-year contract to remain at FiNet and not jump to another firm.

Management at Wells Fargo would not discuss details of the planned changes to the compensation "tax" for advisers who move to FiNet, but spoke in no uncertain terms about their desire to smooth the transition for employees who want to make the move to being independent contractors.

"The good news is we have looked at the hurdles, the toll or tax, whatever you want to call it, and want to make sure advisers who are perfect for independence have the smallest hurdles as possible," said Alex David, head of the branch development group at FiNet. "We made some very significant adjustments, with perhaps some others down the line."

Since 2004, when the broker protocol was established, the industry has moved on and evolved from the fight for clients. Wall Street should know by now that carrots work better than sticks, particularly when it comes to financial advisers.


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