BrokerDealers Beware: Watch Your Step Before You Skip (To a New Firm)

BrokerDealer.com blog post courtesy of extract from 11 August InvestmentNews.com column by Mason Braswell

investmentnewslogoBrokerage firms may be monitoring their brokers’ investment accounts for signs that a broker is about to jump ship.

Firms have long monitored brokers’ personal trading accounts for signs of suspicious trading activity. But certain behaviors — such as large withdrawals, moving assets into the accounts owned by family members or suddenly liquidating shares in proprietary products — may also suggest that a broker is planning to switch to another firm.

Indeed, brokers who make big changes to their accounts in anticipation of a job change run the risk of being fired or even facing legal consequences, said Sharron Ash, chief litigation counsel at the Hamburger Law firm, which specializes in representing brokers in transition.

“It’s certainly something that brokers who are planning a transition have to be cognizant of,” she said. “If it falls into the broader basket of anything out of the ordinary it could throw up a red flag.”

Brokers are required to custody their personal investment accounts, and those of their immediate family, at the firms they work for.

Those who are planning to quit often withdraw large sums ahead of the move to cover transition costs, such as paying for property when starting their own office. Also, brokers that owe money on large upfront recruiting loans may also withdraw funds in an attempt to thwart their firms from freezing their assets after they quit.

Liquidating positions in funds held by their firm is frequently done in advance of a move because those products may not transfer easily.

Firms do not take such moves lightly.

“It is very likely that someone from management is going to confront that broker and say, ‘We saw $20,000 or $50,000 come out of the brokerage account, what’s going on?’” she explained. “That’s commonplace and could be a trigger [for additional scrutiny] depending on the answer they get.”

Ms. Ash counsels advisers to be wary of their timing and, perhaps, look for other sources of funds to help prepare them for a transition.

“It’s also about finding a way to manipulate their funds so that it’s not throwing up a red flag,” she said.

Drawdowns can be especially incriminating when combined with a decline in production, according to Ruthann Granito, an attorney who represents firms and brokers in arbitration cases. She said production tends to trail off two weeks ahead of a move because the advisers are worried about whether they will get their last commission check or are focused on their move.

Firms who notice the activity can then do additional due diligence on the brokers or invite additional scrutiny or a review of email and other communications to see if additional action needs to be taken to try and retain those assets.

It can also lead to regulatory problems after the transition.

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