Recoupment of trainee fees impairs industry’s growth

It’s time Wall Street’s biggest brokerage firms reconsider their long-standing practice of trying to recoup training costs of ex-employees who jump ship before they complete their training. The imposition of so-called trainee fees, which has been a common industry practice at such firms as Wells Fargo, Bank of America Merrill Lynch and Edward Jones for decades, is out of step with the realities of today’s increasingly mobile workforce.

For better or worse, employees are less loyal to employers than they were 20 years ago. That’s especially true of Millennials, who are likely to have worked for three or four different companies before they’re 35.

At best, these fees cast the brokerage industry as petty and punitive. At worst, they hamper brokerage firms’ ability to recruit fresh talent — something most can ill afford at a time when advisers’ ranks are shrinking.

IN JEOPARDY

As reported last week in InvestmentNews, the ability of brokerage firms to recover training costs from ex-employees could be in jeopardy if a recent lawsuit on behalf of a former Wells Fargo & Co. trainee, Erika Williams, is successful.

In that case, Wells Fargo is seeking more than $50,000 from a trainee who resigned under duress last June — just a year into the five-year training program. In her lawsuit, which seeks class action certification, Ms. Williams alleges 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.

Disputes involving trainee fees are becoming more prevalent — no doubt due to the fact that many brokerage firms are rebuilding their training programs after tearing them down in the wake of the 2008-09 recession.

Between 2009 and 2011, only six arbitration awards involved claims for the recovery of training costs, according to an analysis by Securities Arbitration Commentator Inc., a securities award research firm. That jumped to 15 in 2012, and another seven cases went to arbitration in 2013.

It remains to be seen whether Ms. Williams is successful in using the Fair Labor Standards Act. If she is, the ability of brokerage firms to recoup training costs will no doubt be significantly curtailed.

No matter what the outcome of the lawsuit, however, the brokerage industry must put an end to the practice of charging trainee fees to ex-employees.

The truth of the matter is that the vast majority of trainee fee disputes are settled before making their way to arbitration. That’s because brokerage firms, which more often than not lose such challenges, are happy to settle — often at rates as low as 5% of the costs.

For the little amount of money that is actually recovered, trainee fees actually do more harm than good. Indeed, asking new recruits to agree to pay back tens of thousands of dollars in training costs if they leave their program is like asking someone to sign a prenuptial agreement before the first date.

BEST AND BRIGHTEST

To be sure, brokerage firms invest a lot of time and money in training. They do not want to see their newly minted brokers walk across the street to the competition. And there may be circumstances in which new recruits enter training programs in bad faith — knowing, for example, that they will continue searching for a new job while also being trained to become a broker. In those cases, it might be fair for brokerage firms to seek some form of reimbursement.

But for the most part, going after training fees is more trouble than it’s worth. Instead, firms should focus their efforts on recruiting serious and well-qualified prospects. Then they should bolster their efforts to retain the best and brightest among them.

There will always be intense competition for top talent. Firms that create environments in which employees want to work — as opposed to have to work — will thrive and prosper in the face of that competition.