Wall Street advisors have sued over deferred compensation for years. One case has changed the game. Rachel Mendelson/Insider
- Wealth advisors save big on taxes with deferred compensation, but it comes with strings attached.
- They often forfeit this money if they leave for a rival too soon, but they can sue for their due
- One lawsuit against Morgan Stanley has opened the floodgates to more legal battles on Wall Street.
For high-earners, putting aside some income is an attractive proposition. The money grows tax-free, with interest, and can be collected in retirement at a lower tax rate. That’s a typical setup for many financial advisors at Wall Street banks. The banks, in turn, make shareholders happy by reporting lower compensation costs since deferred compensation is marked as a liability.
But there are serious strings attached. Advisors have to stay for several years to get this deferred compensation. At Morgan Stanley, advisors forfeit this pay if they leave for another employer before
four years of service. If they meet that benchmark, they get 25% of their deferred compensation in stock, but they have to stay six years to get the remainder in cash.
Advisors have sued to get their due for years. But lawyers for advisors told Business Insider that they believe these suits have reached a tipping point. In November, a federal judge gave a leg up to ex-advisors by agreeing with their argument that Morgan Stanley’s deferred compensation plan is actually a retirement plan, which comes with stiff legal protections. This ruling was used by a lawyer on another case, Alan Rosca, to secure a $3 million judgment against Morgan Stanley on March 25.
Morgan Stanley faces at least 15 similar arbitrations and is fighting back. Rosca’s award cannot be appealed, but the ruling that facilitated it is part of an ongoing suit.
The bank filed an emergency motion on April 2 urging the judge to reconsider or clarify his opinion. Plaintiff attorneys are already using the ruling in advertisements to lure more ex-advisors to sue, according to the motion.
“Morgan Stanley has long offered deferred compensation to financial advisors to reward them for loyalty and good guardianship,” a spokesperson told BI in a written statement. “This is not a retirement plan, as prior arbitration panels have rightly decided, and we think the panel reached the wrong result. We will continue to aggressively defend against meritless attacks suggesting otherwise.”
These suits have become more contentious as hundreds of advisors break away from major Wall Street banks and brokerages to set up their own investment advisory shops, according to Rosca. These independent and hybrid advisories are expected to control 31.4% of the industry’s share of assets by 2027, while Wall Street wirehouses will lose 6.4%, per market researcher Cerulli.
“These companies, they’re trying to come up with compensation packages that will slow the bleeding,” said Cleveland-based Rosca, who has more than 20 similar cases in the works.
Lawyer Rogge Dunn believes these suits are picking up steam as the Biden Administration has challenged noncompetes; the Federal Trade Commission is expected to finalize its proposed ban this year. Deferred compensation plans are not noncompete agreements. But they are golden handcuffs designed to discourage financial advisors from leaving, according to Dunn, and the attack on noncompetes has inspired some to challenge their ex-employers.
“FAs are being more attuned to their rights when they leave,” said the Dallas-based lawyer who has won four similar judgments against Goldman Sachs.
Morgan Stanley faces at least 15 similar arbitrations over deferred compensation. Spencer Platt/Getty Images
The pending Morgan Stanley suit has uniquely high stakes
Advisors are typically required by their employment contracts to take their lawsuits to arbitration, not court. These arbitrations are handled by the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulator. They don’t establish legal precedents, and FINRA arbitrators do not have to follow the law when making decisions. But Rosca still believes the judgment bodes well for similar suits.
“It’s not mandatory precedent, but we think it’s certainly persuasive precedent for other FINRA panels of arbitrators who are looking at this,” he said. “We think those panels will find this award useful because it’s the same plan that applies to all those advisors.”
The $3 million verdict is couch change for Morgan Stanley, but it’s a symptom of a larger problem on the wealth manager’s hands: the pending case that helped it.
In November, Morgan Stanley successfully fought off a class action attempt by 12 ex-Morgan Stanley advisors. A federal judge in New York agreed with the bank that the case, Shafer v. Morgan Stanley, belonged in arbitration per the plaintiffs’ employment agreements.
This would have been a victory for the bank, preventing potentially thousands of ex-employees from suing collectively.
However, the judge also wrote in his ruling that he agreed with the plaintiffs’ premise: that Morgan Stanley’s deferred compensation plan qualified as a retirement plan. Judge Paul Gardephe made several justifications, including that the deferred compensation comes out of advisors’ commissions so it does not qualify as a bonus as Morgan Stanley had argued.
Morgan Stanley disagreed with the opinion and filed its first motion to clarify or reconsider it in December. Attorneys for the bank argued that it was “unnecessary” and “improper” for the court to weigh in on the merits of the plaintiffs’ case. The opinion was given without Morgan Stanley presenting its entire defense as the hearing was only meant to determine whether the suit would go to court or arbitration, they argued.
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“The documents that govern this compensation program, the purpose of the program, the way it is explained to employees, and the conditions precedent to payment under the program, along with multiple other factors, are just a few of the many issues the arbitrators will have to examine on a fully developed factual record,” wrote the bank’s lawyers Meaghan VerGow and Pamela Miller of O’Melveny in a memo supporting the motion.
They argued that the plaintiffs would use it to their favor without reconsideration of the opinion, and so would “countless other plaintiffs yet to be recruited.”
“The Court should make clear that its order does not supersede or cabin the findings that the arbitrators may render on a fully developed record, and permit the arbitrators to reach their own conclusions about such a record, as the parties agreed,” the memo reads.
Their concerns are likely justified, given the outcome of Rosca’s suit. Lawyers told Business Insider that the award and the ruling in Shafer v. Morgan Stanley will likely inspire more ex-advisors to sue.
“FINRA rulings are public, so people pay attention. People ride a bandwagon,” said Dunn. “If lawyers or FAs hear about successfully defeating a deferred comp, then they’re more likely to roll the dice — not even rolling the dice, to pursue their rights.”
It will likely take 9 to 12 months for the Shafer case to reach and complete arbitration, according to Jack Edwards, one of the plaintiffs’ lawyers.
Edwards is cautiously optimistic, acknowledging that each case has different arbitrators. Earlier last year, Morgan Stanley was triumphant in two arbitrations that cited retirement law violations, among a slew of other allegations.
These suits could have a ripple effect across the Street
Former Morgan Stanley advisors call his firm daily to inquire about arbitration, said Edwards, a litigator for Ajamie LLP. The suit has ramifications across Wall Street, as financial institutions typically have similar deferred compensation plans, he said.
“I think generally it’s the same thing. They take part of your commissions, they defer it into the future to keep you around to punish you if you leave and to deter you from actually leaving because they know that typically the customers are loyal to the individual financial advisor, not necessarily where they work,” said the Houston-based lawyer.
Phil Waxelbaum, a recruiter and former JPMorgan managing director, disagreed with the award and the ruling.
“The advisor’s position is ‘They took my money.’ Well, they announced to you that this is the way the pay was going to work in the forward calendar year. They’ve announced it multiple times,'” he said. “You can’t come out of the box after you’ve accepted an employment agreement and then say, ‘I don’t really like this employment agreement.'”
The number of ex-advisors suing — Rosca stated he represents more than 100 others — is a drop in the bucket, Waxelbaum noted. But if it becomes enough of a hassle, Morgan Stanley might reconsider how it compensates advisors.
“They have to make a decision about how many of these cases they might have to defend,” he said. “The easy way out on this is for them to say, ‘Okay, we gave it our best shot. We’re not going to do it anymore.'”
What is more likely is a change in the details. Edwards won a $79 million settlement against Wells Fargo for a class action suit with similar claims. The bank now has class-action waivers in its employment contracts, he said.
Dunn was skeptical that Morgan Stanley or any Wall Street employer would back away from deferred compensation.
“I think that would cause a stampede away,” he said.
And despite the positive momentum for advisors, it is still an uphill battle. Most advisors are wary of scaring off their new employers, the cost of litigation, and how long these suits can take.
“It’s not easy financially, and it’s not easy emotionally,” he said. “And guess what? The big companies know that.”