Like other brokerage firms, The Charles Schwab Corp. is known to be self-protective about its discount brokerage customers. And like other firms, it has sued former brokers whom it suspects of violating prohibitions against soliciting clients.
What is less well-known is that advisory firms that use Schwab Advisor Services as their custodian also risk incurring Schwab's ire if they hire brokers from the company's individual-investor business — particularly if a defector ends up landing some Schwab customers.
A case in point: After Emerson Equity LLC hired former Schwab broker Kristian Colvin in October 2009, Schwab told the firm to find another home for some advisory assets 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 he lost two brokers because of Schwab's move.
Schwab “would not boot” a custody client merely for hiring a former Schwab employee, said Bernie Clark, executive vice president and head of Schwab Advisor Services.
The online brokerage has “no issues with [a Schwab broker's] 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. Clark said.
Mr. Colvin, however, insisted that he didn't solicit any Schwab customers when he moved to Emerson. Nevertheless, about 20 out of the 200 customers he served at Schwab transferred to Emerson on their own.
Schwab filed a complaint against Mr. Colvin. But in October, a Financial Industry Regulatory Authority Inc. arbitration panel came down on the side of the adviser, dismissing the complaint. The panel also ordered the discount brokerage to pay its former employee $219,000 in legal costs.
“They did not bring one client forward [in the arbitration] who said I solicited them,” Mr. Colvin claimed.
Mr. Clark said he would not comment on specific arbitration cases.
Attorney Clinton Marrs, who said he has represented about half a dozen RIA firms in the last year which had run 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.
During litigation, he said, some of the Schwab-affiliated RIA firms he represented received a settlement offer from Schwab under which they could hire former Schwab brokers if they agreed not to accept any more Schwab customers and shared some revenue with Schwab. Some firms settled with Schwab under those terms.
Mr. Clark declined to discuss whether a fee split might be worked out with an advisory firm. He noted, however, that 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, RIAs that do hire Schwab brokers could find themselves in hot water.
“We were told ... by our [Schwab] representative that if anyone hires a Schwab person who was acting as a financial planner [at Schwab], they'd fire that RIA,” said Ken Winans, president and founder of Winans International Inc., which has $130 million under management.
A number of Schwab brokers who have joined other firms or set up their own practice said that some of the customers they served at Schwab's discount business had initiated transfers on their own. Schwab won't stop them, Mr. Clark said, cautioning that the RIA and broker “will have employment contract and solicitation issues” to resolve. He added that the company doesn't pursue [brokers] without “significant evidence” of solicitation.
[More: Schwab accused Morgan Stanley and the two brokers who joined Morgan Stanley of violating a non-solicitation agreement]
Lee Munson, founder of Portfolio LLC, said Schwab was “aggressive and unrelenting” in suing him after he left the firm in 2008. About a quarter of his Schwab clients transferred on their own initiative, Mr. Munson said. Eventually, about $50 million in Schwab assets moved to his new firm, which holds assets in custody at TD Ameritrade.
An arbitration panel dismissed all Schwab's claims against Mr. Munson in 2009.
For their part, Schwab officials said the firm comes out ahead in more of these legal disputes than it loses. And not every Schwab broker has run into trouble after leaving and joining another firm.
“We've not had issues” with Schwab, said Mathew Bacon, a former Schwab broker who now works at Disciplined Investments LLC, which uses Schwab as its custodian.
He pointed out that he “was careful to follow the agreements” and not solicit Schwab clients.
“We respect the relationships our RIAs have with their clients,” Mr. Clark said. “And in return, we expect [the same].”
TD Ameritrade imposes a 12-month non-solicitation period on branch brokers who join one of its RIA firms, said Michael Watson, director of practice management at the firm. “But the real difference between us and others is that our [brokers} are not advice providers,” he said. “They do not have a book of business.”
Fidelity doesn't have any specific policy about dealing with an adviser who hires a Fidelity broker, said company spokesman Steve Austin.
“It's not a concern,” he said.
Fidelity would, however, take legal steps to protect the use of confidential customer information by a former rep, Mr. Austin said.
E-mail Dan Jamieson at djamieson@investmentnews.com.
