B of A Forces ‘Garden Leave’ on Brokers After Defection
by Hugh Son and featured in Bloomberg
February, 2011:
Bank of America Corp., which lost a financial adviser with $5.9 billion in client assets to a rival in December, told some workers to sign agreements forcing them to go on reduced-pay “garden leave” if they plan to resign.
Employees of the bank’s U.S. Trust unit received the notice this week ahead of 2010 bonus payments and were told their continued employment hinged on agreeing to the new policy, said a person with knowledge of the correspondence. Advisers who previously could leave after two weeks notice now must remain for 60 days and are forbidden from soliciting clients for a total of eight months, according to a copy of the document.
“They’re sending the message, ‘Make no mistake, you will incur our wrath, this is not a place you want to leave,’” said Mindy Diamond, president of Diamond Consultants LLC, a Chester, New Jersey-based executive-search firm. “It’s very rare that a company would have garden-leave provisions for producers, and I think this could backfire if people view it as draconian.”
Sallie Krawcheck, 46, head of Bank of America’s wealth management division, is seeking to stem defections as rivals jockey to manage money for high-net-worth individuals. U.S. Trust last year lost Michael C. Brown, whose clients had a typical net worth of $50 million. He joined a startup co-founded by former Citigroup Inc. executive Todd S. Thomson.
The document didn’t say how many of U.S. Trust’s 4,000 employees are affected. The actions were a “streamlining of existing policies” to include more workers, said Susan Thomson, a spokeswoman for the Charlotte, North Carolina-based firm, the biggest U.S. lender by assets and deposits.
No Bonus
Garden leave, a euphemism used in the U.K., refers to the period after giving notice in which an employee remains on payroll while not doing anything connected to the brokerage industry. Hypothetically, the time could be spent gardening.
At U.S. Trust, associates who choose to resign “may be assigned whatever duties” the firm decides during the two-month leave, according to the policy. They’ll forfeit bonuses and must wait another six months before soliciting former clients or colleagues to join their new venture, according to the document.
Employees must also agree that they aren’t subject to the so-called broker protocol, a voluntary recruiting agreement that allows departing advisers to solicit clients without getting sued. Whether U.S. Trust advisers were part of the protocol was disputed in the lawsuit Bank of America filed against Brown and three of his colleagues in December. The bank settled the case in January for undisclosed terms.
Recruiting Trouble
“Your employment is further conditioned upon your agreeing” to the terms of the letter, Bank of America wrote this week. “Should you not comply with these terms, you agree that the company shall have the right to enforce them” through court-ordered actions.
The new policy pertains to workers including private client advisers, portfolio managers and trust officers, according to the document. Garden leave is typically part of employment contracts for senior executives, not employees who deal with clients face-to-face, Diamond said.
Enticements to depart a firm are at “an all-time high” with compensation packages at the biggest brokerages worth as much as 350 percent of an adviser’s trailing 12-month revenue, said Diamond.
The new U.S. Trust policy “could hobble their efforts in recruiting,” said Jonathan Henschen, a broker recruiter based in Marine on St. Croix, Minnesota. “If you have to wait eight months before you can approach your old clients, it will drastically affect your client-retention rate in the first year. People will look at that and say, ‘I’m not going there.’”
Weak Performance
Bank of America, citing “weak new relationship acquisition performance,” also overhauled U.S. Trust employee compensation by mandating that advisers must add at least three new high-net- worth clients in 2011 to be eligible for discretionary awards, according to a separate document.
U.S. Trust, founded a decade before the Civil War, was purchased by Charles Schwab Corp. in 2000. Bank of America created its wealth management division in part by buying U.S. Trust for $3.3 billion in 2006 and purchasing Merrill Lynch & Co. in 2009. The company has about 20,000 brokers, advisers and wealth-management bankers with $2.2 trillion of client balances as of Dec. 31, according to a presentation.
Added Advisers
Krawcheck’s division added about 500 advisers and private bankers last year, a rate that was “somewhat disappointing,” Bank of America Chief Executive Officer Brian T. Moynihan told analysts in January. The business reported that 2010 net income slipped by 22 percent to $1.35 billion on higher expenses.
“We’d expect that number to be stronger,” Moynihan, 51, said during the conference call. “We need to grow that, because our biggest opportunity inside the United States is around the wealth management space.”
Brown managed about $5.9 billion in client money at U.S. Trust, according to Barron’s, which ranked him 28th on its 2009 list of the top 100 U.S. financial advisers. His new company, New York-based Dynasty Financial Partners, offers research and a technology platform for independent advisory firms.
Brokerages are focusing on the wealthiest individuals to boost profit margins. JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc. and Deutsche Bank AG are hiring bankers devoted to helping affluent clients. Assets under management at the four top brokerages slipped 16 percent to $4.75 trillion from 2007 through 2009, while jumping almost 14 percent to $1.54 trillion at independent firms, according to researcher Aite Group LLC.