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Merrill Lynch's Client Transition Program is Under a Harsh Spotlight in Court

By Miriam Rozen February 13, 2018

An age discrimination lawsuit filed by a 76-year-old former Merrill Lynch advisor sheds unfavorable light on the wirehouse’s client transition program.

The program, similar to ones started by rival wirehouses in recent years, aims at keeping clients’ assets with the firm instead of having advisors late in their careers seek independence or sell their books of business to outsiders.

The demographics of their workforces underscore why wirehouses would launch such programs. In the wirehouse channel, 40.7% of advisors plan to retire within the next ten years and that same group manages 39.7% of the channel’s client assets, according to researchers at Cerulli Associates.

But the details disclosed in the septuagenarian’s bias suit against Merrill Lynch highlights how wirehouses’ client transition programs have not always achieved happy endings. The programs have drawn criticism as the wirehouses attempt to strike a balance between two objectives -- stopping seasoned advisors from bolting before retirement and transitioning clients’ accounts to their younger advisors. The tension between those two goals has only increased at a time when some wirehouses -- notably, not Merrill Lynch, but UBS and Morgan Stanley -- announced they would no longer participate in the Protocol for Broker Recruiting.

Begun in 2004, the Protocol, as it's known, lets registered representatives without violations of non-solicitation clauses or SEC Regulation S-P move among firms and avoid related legal entanglements.

The wirehouses exiting the Protocol have arguably made it harder for their advisors to jump ship with their book of business.

Corey Kupfer of Kupfer & Associates in Rye Brook, N.Y., a lawyer who represents advisors, views skeptically the client transition programs and tags them as tools for getting seasoned advisors to forsake control of their accounts at a time when he believes the Protocol no longer applies in many situations.

"The wirehouses are getting more aggressive finding violations they were happy to overlook once they feel that a book has been transitioned, once they are comfortable that there is another broker advisor that is able to keep that client there," Kupfer says.

For 49 years and eight months, Marshall Sale worked for Merrill Lynch in the firm’s Beverly Hills, Calif., and Sante Fe, N.M. branches.

But less than four months before his 50th anniversary, Merrill Lynch terminated Sale, who controlled more than 70 client accounts and more than $400 million in assets, according to his pending age-discrimination suit filed in California federal court. Within one hour of his firing, Sale alleges Merrill Lynch started contacting his clients, targeting those with more than $10 million in assets, to tell them the firm wanted to keep managing their investments even though Sale had been terminated.

In its responses to Sale’s lawsuit, Merrill Lynch denied the allegations and asked a federal judge to toss the suit. The judge wouldn’t toss the case but he agreed to bar Sale from seeking punitive damages. In his ruling, the judge specifically focused on Merrill Lynch’s client transition program and cast it in an unfavorable light. He called "interesting" the timeline during which the firm had repeatedly approached Sale to consider participating in its client transition program.

"Implicit in these statements is the fact that Mr. Sale would be required to retire in order to receive the [client transition program] CTP benefits," the judge wrote. Then, when Sale agreed to form a pooled client team with two younger financial advisors as a start to participating in the client transition program, that event triggered a clock that would have allowed Sale to retire -- with the client transition benefits -- in 2017. But after "issues began to develop within the team, endangering the transition," the firm issued two separate disciplinary decisions against Sale, who had never previously been disciplined during his 50-year tenure at Merrill Lynch, the judge wrote.

"In light of these facts, it is not unreasonable for a jury to deduce that defendants [Merrill Lynch and its managers] were determined to rid themselves of Mr. Sale in a timely manner and, when the possibility of a graceful retirement came in doubt in early 2015, began to consider other options. When the [client transition program] CTP pool collapsed altogether, they placed Mr. Sale on the Heightened Security Plan in order to lay the groundwork for his eventual termination and closely monitored his activity for violations that could be used to justify their actions," the judge wrote.

In Sale’s case, a hearing is scheduled in early March and a trial after that.

Roughly four years ago, when Merrill Lynch introduced its client transition program, UBS, Morgan Stanley, and Wells Fargo also announced similar programs -- all of which compensate seasoned advisors who participate for as many as four to five years after they retire.

In his lawsuit, Sale claims he did "exactly what he was told to do" to participate in the client transition program, even though he "was being heavily recruited" by rival firms.

But in its court documents Merrill Lynch claims Sale violated multiple firm policies and also counters the idea that the firm gave his clients to younger advisors. When he was terminated, other Merrill Lynch advisors "absorbed" his accounts, based on the firm’s ranking system, and 84.43% of those went to advisors over the age of 40 -- a scenario that refutes Sales’ claims of age discrimination, Merrill Lynch argues.


Sale was barred from the client transition program after he engaged in conduct that had put the firm at risk, Merrill Lynch argues in its court documents. "No one at Merrill Lynch ever made any promises to [Sales] that he would be eligible to participate" in the client transition program, other than according to its terms, the firm states.

Sale’s lawyer declined to comment for this story, as did a Merrill Lynch spokesman.

But other wirehouses tout their client transition programs and likely have achieved loyalty as a result of them, according to Cerulli researchers.

Among wirehouse advisors who plan to retire within the next ten years, 41% plan to transfer their practice to another established advisor in their practice, an additional 23% plan to transfer their clients to a junior advisor and 5% indicate their clients will be reassigned by their firm, according to Cerulli’s data.

Yet nearly one-third of advisors are unsure about their succession plan, the researchers say.

Kim Ta, director of Teams and Succession at Wells Fargo Advisors, says her firm has tweaked in the past year its client transition program to ensure each advisor’s retirement is "an orderly process." Wells Fargo offers its advisors multiple options -- sell their book of business to the firm, to another advisor within the firm or split it between the two -- all leading to compensation that may represent as much as 200% of trailing 12-month production to a retiring advisor over a two- to five-year period.

At UBS, a professional familiar with the firm’s program, who asked not to be named in this story, said the firm’s client transition program encourages advisors to stay "because it provides a unique platform" which lets them "gradually reduce their responsibilities when ready, while being rewarded for the business they’ve worked to build and it encourages younger FAs to join teams." Specifically, retiring advisors during a five-year transition period can earn up to 200% production on the accounts they handed over to another UBS advisor. For two of those five years the prospective retirees still work full time and are subject to termination. But for the final three years they are no longer employees and cannot be fired, even though they still receive compensation.

For the lawyer Kupfer, the wirehouses’ exodus from the Protocol and aggressive recruitment for the client succession programs pairs poorly.

"They are trying to throw some crumbs," Kupfer says, "because advisors’ ability to choose has been significantly reduced."