Brokers’ own accounts tip off firms to a move

Brokerage firms may be monitoring their brokers’ investment accounts for signs that a broker is about to jump ship.
Firms have long monitored brokers’ personal trading accounts for signs of suspicious trading activity. But certain behaviors — such as large withdrawals, moving assets into the accounts owned by family members or suddenly liquidating shares in proprietary products — may also suggest that a broker is planning to switch to another firm.
Indeed, brokers who make big changes to their accounts in anticipation of a job change run the risk of being fired or even facing legal consequences, said Sharron Ash, chief litigation counsel at the Hamburger Law firm, which specializes in representing brokers in transition.
“It’s certainly something that brokers who are planning a transition have to be cognizant of,” she said. “If it falls into the broader basket of anything out of the ordinary it could throw up a red flag.”
Brokers are required to custody their personal investment accounts, and those of their immediate family, at the firms they work for.
Those who are planning to quit often withdraw large sums ahead of the move to cover transition costs, such as paying for property when starting their own office. Also, brokers that owe money on large upfront recruiting loans may also withdraw funds in an attempt to thwart their firms from freezing their assets after they quit.
Liquidating positions in funds held by their firm is frequently done in advance of a move because those products may not transfer easily.
Firms do not take such moves lightly.
“It is very likely that someone from management is going to confront that broker and say, ‘We saw $20,000 or $50,000 come out of the brokerage account, what’s going on?’” she explained. “That’s commonplace and could be a trigger [for additional scrutiny] depending on the answer they get.”
Ms. Ash counsels advisers to be wary of their timing and, perhaps, look for other sources of funds to help prepare them for a transition.
“It’s also about finding a way to manipulate their funds so that it’s not throwing up a red flag,” she said.
Drawdowns can be especially incriminating when combined with a decline in production, according to Ruthann Granito, an attorney who represents firms and brokers in arbitration cases. She said production tends to trail off two weeks ahead of a move because the advisers are worried about whether they will get their last commission check or are focused on their move.
“If he moves money out of his account and into an account they don’t have a right to [freeze] and his production trails off, that might be giving them a heads up he intends to leave,” Ms. Granito said. “It’s like a puzzle, and each piece of the puzzle may have no meaning, but together it paints a picture.”
Joint accounts, for example, may be frozen by the firm, so many times, brokers will have their spouse handle their household bills from a bank account that is only in his or her name.
A former compliance chief for Merrill Lynch said that he was not aware of the firm’s home office looking at brokerage accounts for signs of a move, but that branch managers who are already suspicious of a team who seems restless may pay more attention to their accounts.
Firms who notice the activity can then do additional due diligence on the brokers or invite additional scrutiny or a review of email and other communications to see if additional action needs to be taken to try and retain those assets.
It can also lead to regulatory problems after the transition.
Even if the adviser manages to slip under the radar before the move, their firm can review brokerage statements and withdrawals to prove when the broker was looking to make a move. That can sometimes hurt the broker if there is a dispute after resignation, charging that the broker was taking action in anticipation of a transition while still at the firm, Ms. Ash said.
Firms can also use it to go after brokers who have spent down their assets as a way to try and claim they are unable to return the remaining balance of an upfront recruiting loan. Brokers will sometimes put their money into a spouse’s account or invest in property and then show a smaller balance in their bank or brokerage accounts as a way to avoid payment, attorneys said.
Beverly Jo Slaughter, managing counsel in Wells Fargo’s Corporate Law Department said that firms should be able to use information about an experienced advisers’ withdrawals from their brokerage accounts in cases where the broker is claiming after the move that they cannot pay their bonus.
“If you have a financial adviser whom you believe to be under financial pressure, best practice is we counsel people that’s the sort of people you want to be looking for … because there is potential for investor harm,” she said, speaking at an event for the Practicing Law Institute in July.
In the same way firms should be looking for advisers who might have been taking money out or shifting assets to try and avoid payment on their loans, she said.
A Wells Fargo spokeswoman, Rachelle Rowe, declined to comment for the story, as did spokeswomen from Merrill Lynch and Morgan Stanley.