After eight years at Smith Barney, William Meyer and Marcy LePrell had had enough.
Clients had grown nervous during the barrage of headlines since the company announced a deal in January to join forces with Morgan Stanley, and they had to be reassured their assets were safe after Smith Barney's parent, Citigroup Inc., needed government help.
Looking for a firm that had not been embroiled in the subprime mortgage mess, the pair accepted an offer from Janney Montgomery Scott LLC. But during their first day in their new office in Lancaster, Pa., a call came from its lawyers, saying Smith Barney was accusing Meyer and LePrell of taking client information in breach of the protocol for broker recruiting.
Their attorney, Thomas B. Lewis of Stark & Stark PC in Princeton, N.J., said the charge was the last thing they expected.
Bernadette Holland and Amy Villani, another Pennsylvania advisory team that had left Smith Barney for Janney, were already being sued. Their attorney could not be reached for comment.
The 2004 protocol agreement, which has been signed by all the wire houses and most of the regional firms, permitted departing advisers to take their clients' basic contact information but said other details, such as account numbers and positions, would have to be left behind.
Meyer and LePrell, who are awaiting an arbitration hearing with the Financial Industry Regulatory Authority, deny any wrongdoing. "This was a clean protocol departure," Lewis said. "There's no evidence of wrongdoing and no evidence they took anything they weren't allowed to under the protocol."
Smith Barney would not discuss active litigation, but a spokesman said: "We believe strongly in the broker protocol and will always work to ensure that participants live up to its terms."
In the first seven weeks of this year Smith Barney reportedly lost 539 brokers, or nearly 80 a week. That's more than double the rate last year, when its head count fell by 11%, to 13,765.
Lewis says the firm is using the protocol to intimidate its brokers. "Smith Barney is attempting to send a strong message to its work force: 'We will look closely at the way you depart.' "
The approach is not limited to Smith Barney, he said — all the wire houses are losing more advisers to the regionals, even though the regionals do not offer the same huge transition packages.
Dick Sorenson is becoming increasingly familiar with the issue. After 21 years at UBS AG, he joined Royal Bank of Canada last month as director of its Portland, Ore., complex and immediately began getting inquiries from brokers looking to move.
He said he is well aware of the increased scrutiny around protocol procedures and is always careful to talk recruits through the transition process. Surprisingly, he said, many of the advisers, particularly those who have spent the majority of their careers at one firm, are not aware of the protocol rules. "We have to make sure they understand how important it is. We don't belong in courtrooms. We [should be] trying to make this happen for clients."
J.J.B. Hilliard, W.L. Lyons Inc. normally hires eight to 10 advisers a quarter. Since November the Bowling Green, Ky., firm has brought 40 advisers on board, the majority of them from wire houses, said Darryl Metzger, director of its private client group.
In response, he said, wire houses have stepped up enforcement of the protocol's terms. "If anybody even hiccups, or makes an innocent mistake around the protocol, the wire houses are going after them. They're trying to stem the flow, but the floodgates are open."
Hilliard Lyons employs three dedicated transition teams to help new advisers bring clients over in compliance with protocol procedures, Metzger said. At the moment all three teams are busy, and the firm has another 130 or so advisers interested in joining. "We used to only have potential recruits coming through to look at the firm once a week. Now we're doing it every day of the week."
Rhett Neuman, who recently joined Royal Bank's Stillwater, Minn., office from Wachovia Securities, said the new firm gave him and his team members a guidebook to help them comply with the protocol. Neuman, who oversees $130 million of assets, asked clients to include a copy of their last statement along with their transfer documents, and he asked them to give his team access to any tax information from Wachovia.
Despite the difficulties in moving clients, he said he is happy he made the transition. "The biggest motivation was the ability to control our own destiny. We couldn't do that anymore at Wachovia," he said. After Wells Fargo & Co. bought Wachovia Corp., "we were being strung along, month to month, and not being informed."
The team was happy to find a firm that was not involved in the subprime crisis and they gave up a big recruitment deal to move, Neuman said. "I didn't want to sell my soul. I hoped to do the right thing for my clients and wanted a platform that really allowed us to do that."
