Big Green caves on issue of defectors

Glasnost is arriving at American Express Financial Advisors.

Effective next year, Big Green promises it won’t sue dissatisfied advisers who quit the company and take clients with them as long as they meet certain conditions.

This reverses a long-standing policy of hauling advisers who quit into court to recapture the clients and assets that go with them. Brokerages in the past have lacked success in these types of suits, and in American Express’ case there’s been a surge in the number of settlements, say lawyers who have represented defectors.

To get this deal, advisers must have at least six years’ service, give notice, turn over original client records (they can keep copies), and refrain from recruiting colleagues at American Express for a year.

“None of us want to leave, but you want to know that no one’s going to put walls up around you,” says Daniel J. Candura, a Boston-based adviser who served on a nine-member panel that worked with management on redoing the contract. “I give credit to Brian Heath,” says Mr. Candura of American Express’ general sales manager who worked with the panel.

The core of the issue is the “independent” status of American Express’ advisers. Unlike traditional brokers, they pay many of their own expenses, including for things like office space, in exchange for the right to use the American Express name, and get base compensation that’s higher than usual brokerages.

The move is meant to keep advisers from leaving, a problem the company has been facing as competitors such as LPL Financial Services of Boston or the brokerage units of SunAmerica Inc. in Los Angeles have raided the firm.

American Express, then, is scrambling to make itself more adviser friendly. Facing stiff competition, it too wants to attract top brokers from rivals as it tries to double its adviser roster to 20,000 and increase its current assets under management of $228 million.

It’s also expanding the range of mutual funds and other products advisers can sell and ramping up its online brokerage offerings. AmEx is boosting adviser payouts to 85% of commissions from the current average of 45% to 55%, with the better ones getting deferred compensation plans.

“It has been an interesting discussion in my career with who owns the client,” says Doug Lennick, executive vice president of advice and retail distribution for American Express. “The answer is nobody. We’re comfortable with our ability to compete fairly for clients.”

The noncompete clause “was one of the reasons why outside independents were hesitant” to join AmEx, says Mr. Lennick, adding that a broader product line and higher pay should help attract them.

An experienced West Coast adviser for American Express who has been critical of his company in the past applauds the changes. Before, American Express “was kind of like a Communist country,” the adviser says. “They were putting up walls trying to keep people inside and no one outside wanted to come in. That’s changing.”

Security is the issue

In the past, “people left because of pay structure and because they didn’t have security” in owning their clients.

The noncompete clause waiver comes in the wake of a broader move to change the entire adviser compensation structure. Beginning next year, advisers will have a choice in how they can be paid. Some will be strict employees of the company. Others will work on a franchise basis and have more independence.

Next year, others will be fully independent advisers who will trade through Securities America, a brokerage that American Express acquired last year.

When the contract revisions were first unveiled to the advisers during the summer, many revolted when they saw the noncompete clauses.

American Express retreated though and parleyed with some of its more successful advisers to create a more acceptable contract. A revised contract will be issued next month.

Of course, the new contracts will also spell out the advisers’ obligations to the company. For instance, under the franchise agreement advisers will be required to write at least five financial plans or garner $3,000 in planning fees each year; no such requirement exists in the current contract.