An ongoing case involving the bankruptcy of a former UBS financial advisor has raised crucial concerns over the nature of sunset packages.
A court-appointed trustee filed a complaint last week against UBS in an adversary proceeding arising from one of its former financial advisor’s voluntary bankruptcy.
The trustee wants UBS to turn over some $36,000 to distribute among the creditors of Walter J. Keating, the bankrupt retired advisor. That amount represents approximately what UBS still owes Keating as part of his "Legacy Financial Advisor Agreement" – the sweetened retirement deal offered to Keating after working for UBS for 39 years and handing over his clients to other UBS advisors.
But UBS wants to apply the funds to pay off a $90,000 loan Keating previously borrowed from it.
The case raises an important question about sunset packages: Are such payments current or deferred income?
If the funds are deferred income, then in a bankruptcy proceeding the courts will require the funds go to a trustee to be distributed to creditors. But if they’re current income, the court lets the money stay outside the reach of trustees and creditors.
UBS's objections to turning over the funds highlights the importance of sweetened retirement deals for the industry, given that half of the currently working financial advisors plan to retire by 2032, according to a Cerulli report.
And UBS is not the only wirehouse which has offered such deals to encourage retiring advisors to hand over clients to other reps at their firms instead of selling their book to outsiders. Merrill Lynch, Wells Fargo, and Morgan Stanley all have similar programs.
“Succession planning for advisors who are approaching retirement is a critical issue for firms in all channels. Every major wirehouse has a program to address this. Larger independents have internal departments to match up buyers and sellers to ensure a smooth transition. Nobody wants to lose the assets when advisors retire or have them decide to jump ship, get a deal elsewhere and then transition their assets to a younger advisor,” says Mark Elzweig, president of the recruiting firm Mark Elzweig Company.
Part of the challenge for wirehouse employers is that retiring advisors with robust books of business know they have options. “Getting paid twice has been a popular strategy for advisors retiring in the past few years,” and advisors can achieve that objective by jumping firms, Elzweig says.
But for the trustee in Keating’s case, who filed suit against UBS, the issue is simply getting the best outcome for creditors.
“We tried to resolve this with UBS,” says Thomas J. Polis, a lawyer with Polis & Associates in Irvine, Calif., who represents the trustee.
A UBS spokesman did not respond to an inquiry.
William Howell, a Palm Desert, Calif. lawyer who represents Keating, declined to comment, citing attorney-client privilege concerns.
In his lawsuit, the trustee argues the UBS payments as part of Keating’s retirement deal qualify as what bankruptcy judges consider "pre-petition income" – money earned by the individual before he asked a bankruptcy court for protection from creditors. Therefore, the trustee argues those payments should go to repay creditors, rather than to Keating or UBS.
Keating, along with his wife, filed for bankruptcy protection in May 2017.
In July this year, the federal bankruptcy judge presiding in Keating’s case ruled that the UBS payments were not “post-petition” funds and therefore not exempt from funds to be earmarked for creditors.
Keating previously testified that he had entered into the sweetened retirement agreement with UBS, which would call for the wirehouse to pay him about $4,000 a month from March 2016 to February 2021.
In his bankruptcy filing, Keating stated that he earned more than $140,000 his last year working for UBS, that he and his wife owed $160,000 in debts to unsecured creditors and domestic obligations, and they owned a $645,000 house and $25,000 recreational vehicle.
The bankruptcy judge’s ruling, which treats Keating’s sunset package as deferred income, is wrong, according to Bill Willis, the president and CEO of the recruiting firm Willis Consulting. “I have no reason to believe that a sunset package is deferred compensation. It was a deal that was made for him to participate in the current and future value of his client base,” Willis says.
Willis’ point will likely fit into arguments UBS makes in its answer, due at the end of the month, to the trustee’s lawsuit.
For now, Willis says about Keating, who after so many decades in the industry, filed bankruptcy: “I feel very sorry for him.”