By Dobin & Jenks (all)
Any broker who has moved from one firm to another has heard about, or received, them. They go by various names - Transitional Compensation, Employee Forgivable Loan, and Recruiting Bonus are among the names given to these payments. Essentially, the brokerage firms are hiring experienced brokers and "loaning" the broker money to ease the transition between firms. If a broker is successful at moving the vast amount of his or her production, then the forgivable loan becomes extra money in a good year.
But the past 18 months have been lean ones for brokers. Clients are unhappy. They are hesitant to change firms and follow a broker whom they blame for their losses. Brokers whose books of business are fee-based have seen their fees decrease as their clients' account values decrease.
Even worse off are the bottom quintile (20%) of the production force. The brokerage firms view these brokers, many of whom may have been better producers during better times, as expendable. As part of the consolidation and contraction of the brokerage business, the firms are letting these lower producers go. And the firms want their money back.
I have spoken with an in-house lawyer at a major wirehouse who told me that his firm's collection people are aggressively pursuing these lower quintile producers who were fired or let go in a "reduction in force" layoff. In today's economic times, this hardly seems fair that a broker is hit with the double-whammy of a loss of a job and a demand for repayment from an employer who no longer found the employee desirable. This does not make sense.
Virtually all of these cases must go to arbitration. Soon, we will begin to see an increase in the filing of collection case against former employees. In about nine to twelve months, we will see an increase in arbitration decisions. It will only be then that we will know whether the arbitration system thinks that these firms were being fair.
Full post as published by The Law Planet Blog on April 17, 2009