The president of a broker-dealer says that Charles Schwab took some of his assets off a custody platform after he hired a former Schwab employee. An isolated event? An attorney claims he has handled several cases over the last year arising from similar moves by the discount broker.
Like other brokerage firms, the Charles Schwab Corp., has a history of suing defecting brokers who may have violated their non-solicitation agreements.
But of late, the company appears to be going a step further. Some sources say the online broker has been telling firms that hold assets in custody at Schwab Advisor Services not to hire brokers from Schwab's discount-broker business with the expectation of taking Schwab customers with them.
If Schwab-affiliated advisers violate this policy, they can find themselves on the outs with their custodian, the sources say.
A case in point: After Emerson Equity LLC brought former Schwab broker Kristian Colvin on board in October 2009, Schwab told the firm to find another home for some advisory assets the broker-dealer kept on a Schwab platform.
"They certainly didn't call up and say, ‘We're kicking you off because [of Mr. Colvin],'” said Dominic Baldini, founder and president of Emerson. "They just said, ‘We have the right to kick you off.'”
By Mr. Baldini's lights, the move was tantamount to "tacit intimidation," adding that that he lost two brokers because of Schwab's move.
Bernie Clark, executive vice president and head of Schwab Advisor Services, said the company "would not boot" a custody client merely for hiring a former Schwab employee. The online brokerage has "no issues with [a Schwab broker] joining an adviser,” he said. “We wish them well. What we don't want to see is [former Schwab brokers] soliciting … assets that were given to them at our firm."
Mr. Colvin, however, insists that he did not solicit any Schwab customers when he moved to Emerson. And in October, a Financial Industry Regulatory Authority Inc. arbitration panel came down on the side of the adviser, dismissing a complaint Schwab brought against Mr. Colvin. The panel also ordered the discount brokerage to pay their former employee $219,000 in legal costs.
Mr. Clark said he would not comment on specific arbitration cases.
But attorney Clinton Marrs, who said he has represented about half a dozen RIA firms in the last year that ran afoul of Schwab's policy, had hard words about Schwab's approach. “It's anticompetitive,” he said. “It's restraint of trade."
Mr. Marrs, a partner at Tax Estate & Business Law Ltd., declined to name specific clients he has represented out of fear of drawing attention from Schwab. But he claimed former Schwab brokers may be allowed to work at a Schwab-affiliated RIA — if the advisory firm agrees not to accept any more Schwab customers and shares some revenue with Schwab.
Mr. Clark declined to comment on whether a fee split might be worked out with an advisory firm. And he says any conflicts with Schwab's RIAs are few and far between. As he put it, the number of instances of independent Schwab-affiliated RIAs hiring a Schwab broker is "de minimus."
Nevertheless, those brokers who do leave Schwab for other firms could find themselves in murky water. That's particularly true for those brokers who say a portion of customers they served at Schwab's discount business have initiated transfers on their own.
Schwab won't stop them, Mr. Clark said. "But they [the RIA and broker] will have employment contract and solicitation issues" to resolve.
"We respect the relationships our RIAs have with their clients," he noted. "And in return, we expect [the same]."
