Posts filed under “Wages & Income”

Advisor/Broker Movement in the Finance Sector

The following was co-authored a former UST employee, now working at another bulge bracket firm and Barry Ritholtz. It is a little inside baseball, but is quite instructive as to the state of the finance industry.


Bloomberg broke the story about U.S. Trust (a division of Bank of America) slapping its advisers with a draconian adhesion contract mere days before they were to be paid their 2010 bonuses:

Bank of America Corp., which lost a financial adviser with $5.9 billion in client assets to a rival in December, told some workers to sign agreements forcing them to go on reduced-pay “garden leave” if they plan to resign.

Employees of the bank’s U.S. Trust unit received the notice this week ahead of 2010 bonus payments and were told their continued employment hinged on agreeing to the new policy, said a person with knowledge of the correspondence. Advisers who previously could leave after two weeks notice now must remain for 60 days and are forbidden from soliciting clients for a total of eight months, according to a copy of the document.

I never practiced employment law, but damn if this doesn’t strike me as abusive at the very least; whether its enforceable is another question entirely.

Most people who had the option would not sign — but it strikes me as extremely coercive. The implication, according to a UST employee we spoke with, was that if you didn’t sign it, your  bonus was put at risk. (This would make for an interesting class action case).

Assume you are an RIA/Broker working for a mega-firm. You do your work, you are not looking for another job. Your family has been counting on your 2010 already earned bonus. It is often the lion’s share of your annual compensation. Unless you are willing to sacrifice 50% + of your annual wages, you have no choice but to sign this onerous labor agreement.

You have been coerced.

Given all the brouhaha about unions, issues such as this make it hard to argue their necessity ended last century. Would an atrocity like this have any chance of taking place under a collective bargaining agreement? To preempt the argument that (presumably) high-earning financial advisers have no real need for collective bargaining, I offer the following six letters:  NBA, NFL.

For a bit more “inside baseball” on this file, consider the fact that all financial services firms essentially say the same thing, to wit:  “Our clients’ interests come first,” or some such pablum. Of course, the reality is that their fiduciary obligation is to their shareholders; Recall that attempts to place a fiduciary obligation to their clients was met with fierce resistance.

So how do we reconcile firms supposedly putting their clients’ interests first with those same firms putting those same clients’ advisers on garden leave, and then forcing an eight month non-solicitation?  That period of separation between an adviser and a client who wants to be with him is an eternity in the brokerage business — the S&P500 went from 1300 to 680 between August 2008 and March 2009.  How’d you like to have been unable to speak with the person who did your retirement planning, asset allocation, or any other financial management?

Your most trusted adviser? Sorry, we are concerned he might go to another firm with your assets, so you cannot speak to him now. Clients first!

Prior to 2004, brokerage firms routinely did two things:

1) Paid absurd amounts of money to recruit other firms’ brokers in a massive, zero-sum circle jerk, the stupidity of which is simply mind-numbing.

2) Slapped temporary restraining orders (TROs) on departing brokers to prevent them from taking their clients.

They ultimately realized that the only people making out on the TROs were the attorneys, so three firms — Merrill Lynch, UBS, and Smith Barney — drafted and signed the Protocol for Broker Recruiting (see below). In a nutshell, it put an end to the madness of TROs by establishing an agreed upon  set of rules which (if followed by the brokers and their firms), would allow freedom of movement between firms.  That took care of item #2 above.  Item #1, remarkably, after a distinct recent lull courtesy of the financial crisis, is now going gangbusters again, with recruiting packages at all time highs — up to 300% (or more) of a broker’s trailing 12 months production.

Here’s the stated goal of the Protocol for Broker Recruiting:

Note the focus on the “clients’ interests.”

Although only three firms initially established the Protocol, over 500 are now signatories.  But guess which firms never were?  U.S. Trust and Bank of America.  So now U.S. Trust — having lost a broker with $5.9 billion in assets under management — is going to try to keep its remaining adviser workforce in place by slapping this onerous contract on them.  Whether or not it would hold up in court — if it ever got that far — is questionable (I tend to think it would not, but it will take an adviser with cojones to challenge it).

The bigger mystery to me is how in the world they — U.S. Trust — expect to hire any new advisers. Do they think any adviser with even one functioning neuron is going to walk through their doors and sign such a document when there are dozens of other firms he could go to free and clear? Are they so delusional as to think their “platform” is so far superior everyone else’s that it will trump their new Roach Motel employment policy?  Could management possibly be so disconnected from reality?

There has been much hand-wringing over whether or not parent B of A could (or would) attempt to impose a U.S. Trust-type adhesion contract on its 16,000+ strong Merrill Lynch advisory workforce. We tend to think not, for a couple of reasons, the most compelling of which is simply this: Imposing a U.S. Trust-type adhesion contract flies in the face of both the letter and the spirit of the broker protocol. There is no reconciling or harmonizing the two — they are two separate documents (the protocol and the adhesion contract) that are precisely at odds with each other.

Beyond that, Merrill can’t withhold its advisers bonuses for the simple reason that its advisers don’t get bonuses. So the minute they try to impose this draconian measure, there would be an unprecedented rush to the exits as brokers simply resigned en masse.

Of course, companies have done some remarkably stupid things — with or without McKinsey’s help — but a move like this would likely do irreparable damage to Merrill’s wealth management advisory business. Some we have spoken with believe it would even sound its death knell.

So, lets give thanks to the management at U.S. Trust: I greatly appreciate your grievous error. You have made your firm a far less desirable place to work — a roach motel of financial services that no longer can attract top tier talent. Thank you for attempting to shackle your workforce against its will.  Thank you for ensuring that no quality advisers in search of a new shop will give yours a look. I  have personally spoken with several top-flight UST advisers who have been very loyal, productive and happy at UST — until the moment they were forced to put pen to paper on the new(and quite possibly unenforceable) contract.

You’ve now turned your workforce against you. Well done. You have made my job of attracting top flight talent, asset managers and advisors infinitely easier.

To the management at Merrill Lynch: Please follow UST’s lead. My AUM will thank you for it . . .


See also:
The rise of the RIAs: $1.7T and counting  (Investment News)

Category: Corporate Management, Investing, Wages & Income

Industry Code: IBGYBG

The phrase I was looking for in the last post was “I’ll be gone. You’ll be gone.”

Iain Bryson was the first who suggested it, and I then tracked it down to a few sources, the first of which was Jonathan A. Knee’s “Accidental Investment Banker.

Its also mentioned in this 2009 video:


click for video

Transcript after the jump

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Category: Bailouts, Derivatives, Really, really bad calls, Wages & Income

Average Income in the United States (1913-2006)

A pre NFP look at the really long term growth of average income in the USA, via Visualizing Economics: > Average Income in the United States (1913-2006) As of May 4, 2008

Category: Digital Media, Employment, Wages & Income

by William K. Black

Originally published December 4th, 2008,


Our different views prove that hindsight is often myopic. Larry White’s take is that Clintonian regulations perverted private incentives.

The boom and bust happened in a system with … extensive legal restrictions on financial intermediation. Nor have we had banking and financial deregulation since … 1999.

(One can’t explain an unusual cluster of errors by citing greed, which is always around, just as one can’t explain a cluster of airplane crashes by citing gravity. Anyway, the greedy aim at profits, not losses.) [T]o explain industry-wide errors we need to identify policy distortions capable of having industry-wide effects. The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. Regulatory distortions intensified in the 1990s.

Perverse Compensation Systems are the Key

I disagree with Larry’s theses, but have space to demonstrate only an alternative perverse incentive. What went wrong is that modern compensation systems did not “align” interests, but rather created perverse incentives to engage in accounting “control fraud,” where the CEO uses an apparently legitimate firm as a “weapon” to defraud creditors and shareholders. [1] No regulation forced any lender to make a bad loan. Larry misses the key dynamic: “The greedy” do not “aim at profits, not losses” when compensation schemes are perverse. They maximize short-term accounting “profits” in order to increase their wealth. Making bad loans, growing rapidly, and extreme leverage maximize “profits.” Bad borrowers agree to pay more and it is impossible to grow rapidly via high quality lending. Lending to the uncreditworthy requires the CEO to suborn controls, maximizing “adverse selection.” This produced an “epidemic” of mortgage fraud, particularly in the unregulated nonprime sector. The FBI began warning in September 2004 about the mortgage fraud “epidemic.” [2] Fraudulent loans cause huge direct losses, but the epidemic also hyper-inflated and extended the housing bubble, and eviscerated trust, causing catastrophic indirect losses. When we do not regulate or supervise financial markets we, de facto, decriminalize control fraud. The regulators are the cops on the beat against control fraud—and control fraud causes greater financial losses than all other forms of property crime combined.

The most relevant economic works for understanding these crises are by Akerlof and Romer, Galbraith, and Minsky. Akerlof and Romer explain why “looting” (control fraud) can occur and the fraudulent steps looters take to optimize short-term accounting profits (which destroy the firm). [3] Note that they are writing about a form of a “market for lemons” in which the CEO maximizes information asymmetry. The failure of economists discussing the ongoing crises to cite the work of a Nobel laureate writing in the core of his expertise demonstrates why we have failed to learn the proper lessons from prior financial crises. James Galbraith extends Akerlof and Romer’s analysis to show why the state aids fellow control frauds. [4] Minsky describes the “Ponzi” phase of a crisis and why financial instability reoccurs. [5]

Modern executive compensation systems suborn internal controls. (Control frauds do not “defeat” controls—they turn them into oxymoronic allies.) The Business Roundtable’s spokesman, Franklin Raines, Fannie Mae’s former CEO, explained in a Business Week interview what caused the epidemic of accounting control fraud that became public in 2001 with Enron’s failure.

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Category: Regulation, Think Tank, Wages & Income

Labor Costs vs Consumer Prices 1950-2010

> The Bloomberg chart above compares year-to-year percentage changes in labor costs and consumer prices – from 1950 to present,  for the past six decades (data source:  Labor Department). These indicators had a high correlation — 0.82 during the period — according to Brian Belski, chief investment strategist for Oppenheimer & Co.  Labor costs have…Read More

Category: Inflation, Wages & Income

Wall Street Pay Hits Record Highs (and . . . ?)

The Finance sector is back to record revenue, and of course, record bonuses and pay. I was surprised to see how much greater the Commercial Bank revenue and comp was versus Wall Street totals. When you think about it, they have many more assets, transactions and commercial activity than Wall Street does, so it makes…Read More

Category: Bailout Nation, Bailouts, Wages & Income

LI Home Affordability: Bad, and Getting Worse

A report prepared by the Regional Plan Association confirms that local house prices on Long Island are increasingly elevated relative to incomes. And, residents are nervous about what this means for them: Long Islanders are ever more anxious about how they can maintain their lifestyle, the report found. An affordable home — defined as costing…Read More

Category: Employment, Real Estate, Wages & Income

Census: Household Income & Changes

A pair of fascinating NYT/Census/Google map mash ups from the NYT  this morning. Using US Census  data, they look at a variety of data points: Race & Ethnicity, Income, Housing and Families, Education. Click the link, then select View More Maps, choose topic: click for full interactive versions > Median Household Income Change in Median…Read More

Category: Data Analysis, Wages & Income

Tight Employers: Frugal or Counter-Productive?

Have a quick look at yesterday’s post: Wedbush: Cheap as a Fox. There was a robust discussion in comments — and the general take that resonated with me was summed up thusly: Being judicious about expenses is one thing, but being ultra cheap can be counter-productive and myopic when you figure in the opportunity costs….Read More

Category: Analysts, Corporate Management, Wages & Income

Will the “Thundering Herd” Thunder Out the Door?

Back in October, a friend at Merrill told me about an arbitration award that could rock Bank of America. It was circulating via email from desk to desk, and was causing some consternation amongst the troops. It seemed that two former Merrill Lynch brokers had bolted for Morgan Stanley after the Bank of America acquisition…Read More

Category: Legal, Wages & Income