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For anyone who has studied more than a few brokers’ employment histories, they may have wondered why brokers can often jump from firm-to-firm in such a short time.
Halah Touryalai wrote an article in Registered Rep. Magazine that sheds light on how brokers are lured from one firm to another. Take, for example, Thomas Banus, who was a registered representative of Smith Barney:
In 2004, Thomas Banus moved his book of business from discount brokerage Quick & Reily to Smith Barney. As an incentive to join Smith Barney, Banus was offered about 10 percent of his trailing 12-months production in upfront cash — a forgivable loan. That loan amounted to about $46,000. Each year over seven years, an equal portion of the loan was forgiven. But two years into the job, Banus left Smith Barney. Since then, the firm has been demanding that Banus pay back the balance on the loan with interest, equal to around $39,000, immediately, as stipulated by a clause in his employment contract. In fact, on August 12 a FINRA arbitration panel ordered Banus to do so. But Banus is fighting back.
Touryalai’s article can be viewed in its entirety here.
Apparently, these sort of forgivable loans are often included in contracts for new brokers. For brokers, that sort of up-front cash is a nice incentive; for firms, they can eventually call in the debt if their relationship with the broker goes sour.
Banus’ lawyer, Mark Theirman, also represents 500 other advisors in a class-action lawsuit against other Wall Street firms, alleging these types of contracts are unfair. According to Touryalai, firm promissory notes these days can stay with brokers for as long as nine years, which can be an awfully long time to stay with one company--regardless of the industry. These debts can sometimes exceed millions of dollars.
These sort of promissory notes present a few problems, if it at all influences a brokers’ decision-making.
Some brokers can feel forced into staying with firms – regardless of their business strategies – for the sake of the promissory note. Last week I wrote of Eugene Ross, a former Bear Stearns Cos. broker who blew the whistle on fraud within the company, and was later forced to resign. As part of the arbitration between Ross and his former employer, Bear Stearns are claiming Ross still owes the balance on a loan issued at the start of his employment.
Brokers can also switch to a new firm just because of the promise of up-front money, and Touryalai said this behavior increased following the recent market turmoil.
What ultimately matters, of course, is that none of this serves investors. When these sort of firm-issued loans are not repaid, brokers and firms enter into arbitration proceedings that take FINRA resources away from investors. And brokers, who should always be there to serve customers, have to struggle to protect their own self-interests.
