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No Incentive for Wirehouses to Halt Contentious Deferred Comp Policy: Lawyer

By Miriam Rozen February 10, 2020

News of a Wells Fargo Advisors settlement with its former FAs over a controversial deferred compensation policy isn’t expected to prompt other wirehouses to revise their own policies.

WFA itself is not budging on its deferred comp forfeiture clause, which was at the center of the proposed class action.

WFA entered into a $79 million settlement agreement last week with its former advisors who claimed in a proposed class action that the forfeiture clause in the wirehouse’s deferred compensation plan violated Erisa vesting rules. The forfeiture clause calls for FAs to give up some of their earned deferred compensation if they exit before all of it is vested. Up to 1,400 former Wells Fargo Advisors could potentially be eligible for a share of the settlement.

Deferred compensation has grown as an increasingly larger percentage of total remuneration for advisors at most wirehouses in the past five years.

But it’s not clear how many other wirehouses have forfeiture clauses similar to WFA’s. Merrill Lynch did not respond to requests to FA-IQ’s query about forfeiture clauses. Morgan Stanley and UBS declined to comment.

Their reticence hardly surprises David Siegel, a lawyer with Houston-based Ajamie, representing the former WFA advisors who filed the lawsuit.

Financial advisors from other wirehouses asked Siegel and other members of the legal team representing the ex-WFA advisors to look into their own shops' forfeiture clauses. But the FAs’ lawyers ran into roadblocks. They were not able to extract enough details about other wirehouse’s deferred compensation policies to determine if their plans are vulnerable to the type of Erisa-related claims that led WFA to settle, Siegel says.

In the WFA litigation, Siegel argued that Erisa allows for forfeiture clauses only in “top-hat” tax-protected retirement plans. According to federal regulations, only small groups of highly-paid employees at a company should be covered by such clauses, rather than large swaths of a company’s workforce, Siegel argued in briefs filed prior to the settlement announcement. WFA argued that its plan did qualify as a top-hat prior to the settlement.

And in its statement issued after the settlement announcement, WFA made no concessions of wrongdoing.

“While Wells Fargo has consistently denied the allegations in this class action lawsuit involving former financial advisors, we also believe that resolving this matter is in the best interest of the company,” the statement reads.

WFA has no plans to alter or remove its forfeiture clause, a spokesperson confirmed to FA-IQ last week.

The settlement likely eliminates the possibility of an imminent court ruling on the question of what qualifies as a top hat plan. Thus, no immediate legal precedent applies pressure on other wirehouses — if they have similar forfeiture clauses in their FAs’ plans — to remove or alter those terms, Siegel says.

“I don’t think that brokerage firms are going to en masse give up these forfeitures,” he says.

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Tags:  ERISA plans/institutional management , Fees and compensation , Staffing and recruiting , Regulatory/legal issues , Merrill Lynch , Morgan Stanley , Wells Fargo Advisors , UBS

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