Merrill, Brokers and Retention Bonuses

Bank of America’s Lousy Retention Bonus Gets Worse

By Mark J. Astarita, Esq.

In a blog post I commented on the odd retention bonus program being offered by Bank of America to Merrill Lynch brokers. Odd because it was a small amount of money, it was structured badly, and because other firms are offering Merrill brokers multiples of the retention bonuses to leave Merrill.

Now of course, there is a difference in purpose and strategy in a retention bonus versus a signing bonus, and for the broker and his clients, there is a significant difference in staying with the firm you know, rather than moving to the one you don’t.

But a new wrinkle has come up in the last few days – the agreement underlying the retention bonus.

Under the proposed retention bonuses, Merrill brokers are being forced to sign new agreements. Of course, the bonus is not a bonus at all, but rather a forgivable loan, forgivable over 7 years. But more importantly, there is an accompanying agreement that restricts the broker’s business activity should he leave the firm.

In the agreements that are being circulated, there is not an outright restrictive covenant, but there is a prohibition on solicitation of employees and customers. The language that states that upon leaving the firm, the broker must “return to Bank of America all customer info and records in any shape or form and to be enjoined from using or disclosing all such records.”

With that language, Bank of America has tossed a significant monkey wrench into the recruiting process.  That clause sets the recruiting process back at least 5 years, and could be a significant restriction on a broker’s ability to leave the firm.

For some unknown reason, many brokers think those clauses are unenforceable. They are in fact enforceable, and are enforced quite frequently. However, Merrill brokers have, for years, known that they can leave the firm, take basic customer information with them to a new firm, without worrying about liability, injunctions or other such nonsense. The key ingredient in that ability is the Broker Recruiting Protocol. Now, Bank of America is changing the playing field, and forcing an agreement on the Merrill brokers that takes away this significant protection.

For those unfamiliar with the Protocol, it was a creation of the large firms to end the silly and wasteful practice of firms suing each other when a broker changed firms, with the old firm suing the broker and the new firm, alleging that clients had been stolen, confidential information abused, seeking an injunction against the broker and the new firm from taking the clients. Of course, all of this litigation was useless. While it did delay the broker’s ability to contact his clients, at the end of the day the clients have the absolute right to use whatever broker and brokerage firm they want, and the process almost always resulted in a settlement agreement between the two firms where the broker and the new firm were allowed to take the clients, and the new firm paid the old firm a settlement figure, usually in the $100,000 range, or a percentage of the trailing 12.

In the interim, customers were placed in limbo, unable to move their accounts to continue using the services of their own broker. The firms finally came to their senses, realizing perhaps that these cases always ended the same way, and created the Broker Recruiting Protocol. The Protocol is an agreement, between the brokerage firms, that in essence allows brokers of the signatory firms, under certain circumstances, to take client lists with them when they leave to begin work for another signatory firm and to contact those clients without incurring liability.

The Protocol worked. Brokers who followed its proscriptions changed firms, contacted their clients, and moved their accounts, without major or significant incidents. Brokers benefited from the protocol, as did customers, regulators and even the firms.

However, the Protocol only applies if the old and new firms are signatories to the Protocol, and not all firms have signed on.

Bank of America is not a signatory to the Protocol, and with this contract language, it is thumbing its nose at the Protocol.

Which makes a lousy retention bonus even worse. For the broker producing $800,000 a year, the retention bonus is $600,000, PLUS a restriction on using any customer information when the broker leaves the firm. At the same time, the broker can move across the street, get a bonus of $1,000,000 to $1,600,000, and still have the ability to change firms and keep his clients. Not much of a choice.

The firm’s response? According to press reports, Merrill and Bank of America are telling brokers to “trust us.” Like a wirehouse has never screwed a broker. Trust us, we will get this straightened out, Bank of America will sign the Protocol, just sign this agreement and we will work it all out later.

You gotta love Merrill. Taking a page from the presidential race, it blames others for the mess it has created. In a prepared statement, Merrill says “The Advisor Transition Program does not change any of the rights or obligations that exist for our financial advisors under the Protocol for Broker Recruiting. It has no impact on the Protocol. Suggestions to the contrary are likely the product of those who want to recruit our financial advisors to other firms.”

Nothing like blame the other guy when you get caught. Suggestions to the contrary are not coming from other firms; those suggestions are coming from securities defense attorneys.

The simple fact is the agreement is a legal contract between the firm and the broker. It is enforceable, can be enforced, and since we are talking about Merrill, it will be enforced. The oral promises of Merrill, and its prepared statements, do not and cannot, alter the terms of the agreement. Period. Black letter law. The agreement contains a clause that specifically states “this agreement constitutes the sole agreement between the parties as to the subject matter hereof, and __________ represents that in executing this agreement, __________ has not relied on any statement, promise or representation not set forth herein.”

Merrill brokers cannot rely on the statements of managers, or management, or prepared statements. They do not alter the terms of the contract, and in signing the agreement, and taking the bonus, they are agreeing not to take ANY information regarding their customers with them when they leave the firm, nor to use such information.

And it will not be enough for Bank of America to sign the Protocol. If it signs the Protocol, there is then a conflict between the Protocol and the agreement, and in such an instance, on a strictly legal interpretation, the agreement wins.

Now, without going all legal here, there are plenty of successful defenses that would apply to this situation, and Merrill brokers who sign the agreement might not be totally without recourse should litigation come about when they try to leave.

But why are we discussing litigation? Merrill has come a long way from years ago when their agreements said that every client, even clients that the broker brought to the firm, were Merrill clients when the broker left. The industry has grown to the point where brokers aren’t indentured servants, customers aren’t property, and the playing field was somewhat level. Now Bank of America is throwing that all out the window.

The point is, that restrictive language needs to go. And what is Bank of America thinking? Brokers can walk across the street and get a significantly better deal. Why would a broker stay?

I understand that Merrill is a great firm to work at, and I am sure that the overwhelming majority of its brokers are happy there – the ones I have spoken with are happy, but they are worried, and a bit annoyed. There is a new owner, a bank, and we all know what happens when bankers try to run a brokerage firm, and the old Merrill is not going to exist any longer. Now, you want me to stay, and you are offering me less than half of what your competitor is offering, on more onerous terms? Merrill is good, but it ain’t that good.

Watches for a change in that agreement and Merrill brokers should make sure those agreements are in fact changed before signing them.

Or you can contact my firm in a few years to represent you in the litigation. Quantcast