It turns out the tide hasn't completely turned against wirehouses in their attempts to hold on to the
Morgan Stanley struck a victory on Monday in a dispute over $854,636 in deferred comp-related claims pressed by eight former employees of the Wall Street giant. The win comes following defeats in similar cases for both
Firms' deferred comp policies typically set aside a portion of advisors' compensation for payment at a later date.
But various advisors and lawyers have been able to argue successfully before industry arbitration panels that deferred compensation is, in fact, earned pay that's protected under federal retirement law. Specifically, they contend it falls under the Employee Retirement Income Security Act of 1974, or ERISA, and can't be forfeited simply by a decision to change jobs.
The arbitrators in this latest Morgan Stanley case struck at the heart of such claims. The three-member panel, overseen by the Financial Industry Regulatory Authority, found Morgan Stanley's deferred compensation payments are much closer to bonuses that can be earned by staying with the firm a set number of years rather than a retirement benefit.
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The firm's "deferred compensation program did, as the name implies, necessarily defer income," according to the decision. "It did not, however, in the usual course, defer compensation past employment with respondent, let alone until retirement."
A Morgan Stanley spokesperson said, "We are gratified that after fully evaluating all the evidence, the panel reached the correct conclusion based on the facts and the law: Morgan Stanley awards deferred compensation to financial advisors during their employment to reward them for retention and good guardianship. That is not a pension plan."
Alan Rosca, one of the former Morgan Stanley advisors' lawyers, said he and his colleagues are still studying the ruling. He has said in the past that he's working for more than 200 ex-Morgan Stanley employees on similar cases.
The eight advisors in this latest dispute were all based in Florida and left Morgan Stanley between 2019 and 2022 for jobs at other firms. Their claim sought $588,488.68 in deferred compensation plus interest; $235,395.47 for attorney's fees; and $30,752.29 for expenses and costs.
Phil Waxelbaum, an industry recruiter and the founder of Masada Consulting, said firms that hire an advisor away from a rival will often take any deferred compensation the employee may have forfeited into account in its recruiting offer. In a sense then, advisors who prevail with claims for deferred comp are "double dipping."
"It's built into the recruiting deal, and it's a known variable," Waxelbaum said. "If Morgan Stanley and Merrill Lynch are both competing for a UBS advisor, and the UBS advisor has deferred comp, Morgan and Merrill have to do something to make that person whole, or they're going to lose to a competitor. It's just that simple."
Advisors who receive money to make up for deferred comp they left behind are actually coming out ahead, Waxelbaum. They're receiving an upfront payment for something they would have otherwise had to wait years to claim.
Waxelbaum said the amounts paid in recruiting deals to cover forfeited deferred comp are often open to negotiation. If a firm is generally offering advisors 250% of their past year's revenue to entice them over, the amount might be increased to 260% or 270% when deferred compensation is taken into account.
"It's some number that makes you whole," Waxelbaum said. "And in many cases, it not only makes you whole, but it makes you better because they are paying you in current dollars."
Morgan Stanley's payment policies, according to the arbitration panel's ruling, provide deferred compensation as a mix of stock and cash. With the stock portion, employees have to wait four years for it to vest. With cash, they have to wait six years.
The panel in the latest Morgan Stanley dispute found the firm always presented its deferred comp as an incentive used to encourage employees to stay with the firm over the long term. The firm, the panel said, has a virtually spotless record of providing these payments to advisors who do stick around for the necessary number of years.
"It was designed to provide an incentive to current employees and when it did its job, which it did in the clear majority of instances, its awards did go to current employees, and payments to those in retirement were incidental to this purpose," the panel found. "The awards were not treated as retirement income for tax purposes and were not deposited into retirement accounts."
When lawyers have been able to win deferred comp awards in FINRA arbitration, they've often contended that firms are denying advisors money they had already earned. That was the thrust of the arguments in two recent cases in which arbitrators sided with ex-Morgan Stanley advisors against their former employer.
In June,
Pleadings filed in federal court showed the recent victories by ex-advisors had the industry rattled.
Gardephe's opinion, according to the letter, was being cited as proof that the firm owes deferred comp to advisors who leave. But this latest FINRA ruling suggests the outcome in these cases won't always be in their favor.
Jack Edwards, an attorney at Houston-based
"Because other panels have decided the issue differently, we look forward to future panels considering the issue," he said.
