Morgan Stanley's deferred compensation fight

It’s early days in what is shaping up to be a long, costly slog of a legal battle between Morgan Stanley and former advisors over who controls valuable deferred compensation money, the firm or financial advisors.  

As of the last week of August, Morgan Stanley has defeated five complaints over the past couple of years, filed by former financial advisors seeking payments of money from the deferred compensation plans, while ex-Morgan Stanley advisors have won two such claims.  

Those disputes were decided by three-person panels under the aegis of FINRA Dispute Resolution, the industry forum for lawsuits by advisors and clients against firms.  

There’s a long way to go. Morgan Stanley could be facing as many as 80 such claims from former advisors over the next two to three years, according to attorneys for advisors and industry executives.  

“The big theme here is that these giant brokerage firms, including Morgan Stanley, are going to fight tooth and nail to prevent their former advisors getting their hands on the deferred compensation money in question,” says Jack Edwards, a partner at the Ajamie law firm in Houston. “And they’re fighting because it discourages advisors from leaving to work elsewhere.”  

“A lot of these advisors at the largest firms haven’t left because they don’t want to lose all this money,” Edwards says, adding that he represents more than two dozen claims by advisors against Morgan Stanley, and advisors are seeking deferred compensation money of $80,000 to $1 million in those lawsuits.  

Big firms like Morgan Stanley take a small amount of an advisor’s gross revenue, call it deferred compensation, and require advisors to stay for years in order to vest.  

Until recently, if a financial advisor left a firm with a deferred compensation plan, he or she would have automatically forfeited his or her that compensation, which is also known on Wall Street as golden handcuffs.  

But some advisors – and their attorneys – have recently changed tactics. They are using ERISA – the Employee Retirement Income Security Act of 1974 – to buttress their claims to take the money with them when they leave, alleging that Morgan Stanley’s deferred compensation plan was in violation of that law.  

Advisors are alleging that Morgan Stanley’s financial advisor deferred compensation program is subject to ERISA; when the firm cancels the plan when advisors leave, the wirehouse violates ERISA’s vesting and anti-forfeiture requirements. Advisors allege they are entitled to all of their unpaid deferred incentive compensation.  

Morgan Stanley right now has the upper hand in its cases against former financial advisors.  

A three-person FINRA panel on August 21 denied the claims of two former Morgan Stanley advisors, who were seeking a combined $1.28 million in deferred compensation money, plus interest, from the firm.  

The two advisors, Bryan J. Schon and Michael Dymkowski, both worked at Morgan Stanley in Bloomfield, Michigan, before moving to Wells Fargo Advisors in 2022, according to their BrokerCheck profiles. Schon had 10 years of employment at Morgan Stanley, and Dymkowski nine, and they filed their claim against their former firm last year.  

“We are gratified that after a comprehensive review of all the evidence, arbitration panels are repeatedly reaching the same correct conclusion based on the facts and the law: Morgan Stanley grants deferred compensation to financial advisors during their employment to promote retention and good guardianship,” wrote a company spokesperson in an email. “This compensation is not a pension plan.” 

Meanwhile, Morgan Stanley has also been fighting legal challenges to advisors citing ERISA to get their hands on plan money in the federal courts.  

The firm this July had a setback. According to an article from Law360, on July 10 the Second Circuit Court of Appeals refused to upend part of a lower court’s ruling that former Morgan Stanley financial advisors’ deferred compensation fell within the reach of federal benefits law, meaning ERISA, saying the wirehouse could not clear the high bar necessary to undo the decision.  

US District Judge Paul G. Gardephe ruled in 2023 that certain anti-forfeiture provisions of ERISA do apply to Morgan Stanley’s deferred compensation plan. Morgan Stanley has been fighting that decision ever since.  

Gardephe last November upheld his decision from the prior year that Morgan Stanley’s deferred compensation plan should be governed by federal pension laws, a promising development for advisors looking to get their hands on deferred compensation that may have been forfeited under current rules.  

“What’s at stake is Wall Street’s business model to lock down its most productive and experienced financial advisors,” says one industry executive, who spoke privately to InvestmentNews about the matter. “Just look at Silicon Valley − at tech firms, who pay their engineers well. And they give them perks, all in the attempt to tie people to their desks.”