Brokerage firm learns a lesson about stubbornness in arbitration.

A client approached us last year. He had retired from an independent-style brokerage firm and sold his book of business to another broker. He had signed a “Continuing commission” agreement with the broker and the firm. He was was supposed to get a percentage of the commissions paid by his former clients over the next 3 years. This is all kosher and approved by FINRA pursuant to IM 2420-2

We looked at the agreement and concluded he was entitled to be paid. We wrote a demand letter to the brokerage firm. They told us, in essence, to go down to the beach and pound sand up [not family-friendly expression completed here]. We had a better idea. We filed a FINRA arbitration on our client’s behalf.

A year later, the client had his result. He was awarded most of what we claimed in the original letter. The brokerage firm was told to honor the continuing commissions agreement going forward. But the kicker was that the client was awarded his entitlement to attorneys’ fees. These fees, because the amount in dispute was relatively small, were more than the compensatory award. Frankly, we would have advised the client that it was too expensive to go forward if the fee provision was not in the contract. But it was and we did.

So, in retrospect, would the brokerage firm had been better off paying the demand when it was made last year? Sure. Do they regret their decision now? Who knows. But one thing is for sure. They now see, from a dollars and cents perspective, that settlement is cheaper than trying a case. Will they learn from this? Doubtful. There is an arbitration award out there that now reinforces the validity of their continuing commission contract and how they administer it.

We were pleased to represent the client, who was a gentlemen and quite the raconteur. We only wish that the brokerage had settled when it was the right and smart thing to do.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

UBS forcing out more producers, encouraging expensive financial plans.

OnWallStreet reports that UBS is tinkering with its payout structure. This is not good news for employees or investors.

First, brokers will be paid a 50% payout on financial plans costing $1,000 or more. Huh? There better be some gold plating given with that plan. I would love to see exactly how much work goes into that “plan”. Further, the broker will also get a credit of $250 towards an expense account. So out of the $1,000, the firm is getting $250. That should tell you how much the plan is really worth. UBS is quoted as saying that the average plan costs $4,000. For what?

Most telling, however, is this statement – “Since the firm implemented a plan this year that pays advisors 50% of all financial plans that cost over $1,000, the number of advisors charging for financial plans has tripled.” Does anyone remember when limited partnerships were paying 8% and they were suddenly the hot item? Annuities and other such products have taken their place in the high-payout category. And UBS doesn’t seem to be concerned that they’re seeing increased revenues from financial plans immediately after raising the payout to 50%.

Second, UBS is creating a larger “penalty box”. This is where brokers that the firm considers disposable are placed. They are brokers with 8 or more years of experience whose production is below what the firm considers attractive. UBS’ minimum to hit the graduated grid, instead of a flat 20% payout, is $325,000 for 2014 and will increase to $350,000 in 2015. Really? Is your overhead so high that you can’t afford to pay more than 5 or 6,000 dollars a month on this kind of revenue? The good news for brokers who consistently do this kind of production is that there are many firms out there who would be happy to give you an office and a transitional compensation check.

What the firms really want, though, is for the broker to leave and for the book to stay. Then they get to keep the revenue without having to support another broker. When the penalty box concept first started, the minimums that I was seeing were $250,000. And they were generally implemented when a firm was trying to clean house.

Finally, the firm is discouraging small households — clients whose assets are less than $100,000. When I started in the brokerage business in 1983, I had $2,500 to invest. It went into a high yield municipal bond fund (don’t ask). I got an account statement and I had a broker. And my account grew in value as I deposited more funds in it and did more business. And I remained a client of the firm for 10 years.

So the large firms are essentially giving up on developing clients from the start. They want the people who are already wealthy, in their opinion. Pretty short-sighted, in my opinion. But what do I know, I’m just a lawyer.

That’s the view of one lawyer from Jupiter, Florida. I’m Marc Dobin.