Advisors say Merrill legal loss in OpenArc case shifts RIA balance of power

A judge’s decision to refuse Merrill Lynch a temporary restraining order against OpenArc last month is leaving potential breakaway teams feeling, well, unrestrained, advisors say.   

A federal court judge in Georgia denied Merrill Lynch’s temporary restraining order (TRO) request last month in a lawsuit against breakaway RIA team OpenArc Corporate Advisory. Merrill’s lawsuit was against OpenArc, as well as its new custodian Charles Schwab and investment bank Dynasty Financial Partners.

Merrill accused the defendants of conspiring to run a “premeditated corporate raid” of the Atlanta-based OpenArc team, which managed $128 billion in assets at Merrill Lynch.

In her ruling, Judge Victoria Calvert in the U.S. District Court in the Northern District of Georgia denied Merrill’s request for injunctive relief and a restraining order. For its part, Merrill Lynch remains committed to pursuing further legal action regarding OpenArc’s departure saying the injunction hearing was only​ the first step in the litigation process.

As for the wider impact on the wealth management industry, advisors say Merrill’s failure to win its TRO will empower more advisors to go independent. For advisors who’ve dreamed of independence but worried about legal blowback, this decision proves it can be done, even at massive scale, according to Mike Papedis, founder and CEO of Fusion Financial Partners

“This was a fear-based industry for decades and fear just lost in court. The TRO denial strips away one of the wirehouses’ most effective scare tactics. If OpenArc can move $128 billion in assets and hundreds of employees without being frozen mid-flight, then no advisor can ever again claim that ‘our book is too big’ or ‘our team is too complex,’” Papedis said, calling the OpenArc move “a watershed moment for our industry.”

In Papedis’ view, the TRO denial against Merrill proves that, when executed with discipline, even the largest and most sophisticated teams can transition cleanly and compliantly.

Emphasized Papedis: “OpenArc didn’t just break away - they broke the narrative. Independence has officially gone mainstream.”

Elsewhere, Tracy Byrnes, vice president of women & investing at Lebenthal Global Advisors, points out that Merrill’s setback proves to be even more important for smaller advisors due to its high-profile.

“There is so much litigation in the marketplace, so it’s difficult to keep track. But if OpenArc can face down Merrill and be able to shift $128 billion in assets, it has to give smaller RIAs in particular more certainty about their ability to go independent,” Byrnes said.

All that said, Sharron Ash, chief litigation counsel for Hamburger Law Firm, says that advisors best not be lulled into a false sense of security by the decision, even while they should be encouraged by their new optionality.

“There’s a lot of planning and execution that went into this. But perhaps this encourages advisors who believe transitions are impossible to reexamine and realize they themselves are really the only impediment. Both transitioning to another firm and remaining stuck is a choice,” Ash said.

SHIFTING THE BALANCE OF POWER

Advisors say the case also accelerates a long-brewing power transfer from massive financial institutions to entrepreneurs.

Papedis, for one, believes the notion that only a bank can service UHNW clients is “officially debunked.” In his view, RIAs now have the technology, custodial depth, and capital backing to compete - and win - at the top of the market.

“Expect more top producers to follow this path. Clients take notice. If their multi-billion-dollar advisors can operate freely and still deliver institutional-grade service, clients will start asking why they’re still inside the wirehouse cage,” Papedis said.

Lebenthal’s Byrnes believes the opposite result in the case could have very easily put a stop to dozens of breakways in the system, and further entrenched the wirehouses command over the industry. To the extent this makes other wirehouses think twice about litigation, she believes it’s a benefit for independent firms and their clients everywhere

“The power dynamic was always about size and scale, even though independence is really a preferred model for us, obviously. I also think clients see this as a win, too. If your assets are at a wirehouse and your advisor leaves, it isn’t a good look to see your advisor – the person with which you have the relationship – get sued,” Byrnes said.

Still, Ash once again advises those wirehouse advisors thinking of breaking away to remain cautious.

“This is not so much a shift of power, but rather, perhaps delivers a sobering realization to wirehouses that inertia is no longer enough to keep advisors in their seats.  This single transition can be expected to attract attention of others who may be considering a move, and perhaps the attention of firms losing talent to examine why that is, rather than believing large teams will never leave because it is just too difficult,” Ash said. 

Byrnes agrees, advising potential breakaways that it’s “important to remember it isn’t over,” and there could be other court actions related to OpenArc, not mention other cases where the wirehouses prevail.

“It speaks to how you have to do things the right way. You have to have a process. You’ve got to make sure that the I’s are dotted and the t’s are crossed. There are contractual and regulatory rules you need to follow strictly. And, if you do that, you can make the threats of a wirehouse ring hollow,” Byrnes said.