Deferred comp fight hits claims of advisor double-dipping

In big firms’ fight to avoid paying deferred compensation to advisors who jump to rivals, much of the legal wrangling has centered on federal retirement law.

But another factor is increasingly derailing advisors’ attempts to recoup backpay: Many of the recruiting packages offered by their new firms were designed to make up for deferred compensation left behind. And large wealth managers are starting to see success arguing that advisors who take substantial recruiting deals and then seek unpaid deferred comp from their old firms are effectively “double-dipping.”

READ MORE:What to expect in financial advisor pay in 2025What 5 years of broker compensation data says about advisor payWhy many firms keep adding recruiting loansAiming to get deferred comp ruling overturned, Morgan Stanley missesMerrill prevails against ex-advisor’s deferred comp claim

That argument played a large role in Morgan Stanley’s arbitration victory this month over its former broker Patrick O’Neill, who left for Raymond James in 2018  and sought more than $500,000 in backpay and damages. Sources familiar with the case said Morgan Stanley was able to show that O’Neill’s recruiting deal was structured in part to offset the loss of any deferred comp he forfeited by changing firms.

Offer packages often take abandoned deferred comp into account

Deferred compensation is part of advisors’ pay that typically vests, or is disbursed, after a set number of years. Many firms argue deferred comp is a bonus to reward advisors for remaining loyal by staying with the company. But a slew of lawsuits in recent years has contended deferred compensation is instead legally equivalent to retirement benefits protected under federal law.

Even as many of those cases focused on the Employee Retirement Income Security Act of 1974, or ERISA, more and more attention is being paid to the argument that advisors who switch firms have already been “made whole” for deferred compensation they left behind. Industry recruiters confirm that consideration for unvested deferred comp is regularly part of the offers advisors receive to entice them to move their practices.

Jeff Feldman, the founder of Financial Recruitment Partners, said the likelihood that deferred compensation could be left behind has always been a “stumbling block” in recruitment deals. Recruiting firms have intentionally sought to remove those obstacles by bumping up their offers to make up for what new recruits might be forfeiting.

“The firms will now look at their full picture, including their production, the profitability of the book, and take into account the amount of unvested deferred they’re leaving behind,” Feldman said. “When they put forth the package, there’s going to be a certain amount up-front in cash that’s guaranteed, and then they’ll also address a portion, if not all, of the deferred comp that they’re leaving behind.”

Louis Diamond, the CEO of the recruiting firm Diamond Consultants, said big wirehouses like Morgan Stanley are the most likely among firms to explicitly offer new recruits compensation for left-behind deferred comp. Regional firms like Raymond James will sometimes include similar provisions in their recruiting deals, but not as frequently.

But even if an offer doesn’t contain money specifically to cover forfeited deferred compensation, it’s often understood that the overall size of the deal has been increased to take into account pay that was left behind.

“Usually they are getting bigger overall recruiting deals, and it’s meant to make up for what they left behind,” Diamond said. “Recruiting firms will sometimes add something more to the back end or pay more up front.”

Are arguments over ERISA becoming moot?

Rather than discuss the money recruited advisors receive, lawyers have attacked firms over contentions that their deferred comp policies fall under federal ERISA protections. Deferred compensation, they argue, is like a pension benefit that’s set aside and paid only years after it’s “earned.”

Federal judge Paul Gardephe’s November 2023 decision in a Southern District of New York case involving Morgan Stanley was a milestone for advisor advocates who support this argument: He ruled that the firm’s deferred compensation policies do indeed fall under ERISA. Gardephe later reaffirmed his opinion, and the U.S. Court of Appeals for the Second Circuit last month rejected Morgan Stanley’s attempt to have it overturned.

Major lobbying groups like the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association submitted briefs to the appellate court arguing Gardephe’s opinion was fundamentally flawed. But there may be a far more effective avenue for defending firms’ deferred comp policies: evidence that advisors who switch firms have, in many cases, already been compensated for money they left behind.

Ron Edde, an industry recruiter and the president and CEO of Millennium Career Advisors, said he is far from a fan of deferred compensation, which he sees as yet one more obstacle firms put in front of advisors who may be thinking of leaving for an industry rival. At the same time, he concedes the arguments about double-dipping have merit.

“In these cases, one of the primary requests is: OK, show us how you were harmed, and then, secondarily, can you quantify that harm?” Edde said. “It’s pretty easy for the arbitrators to look at some of these and say, ‘It’s a wash or close to a wash.’ And that’s a pretty defensible argument in these cases.”

At least one lawyer representing advisors in these cases remains undaunted. Doug Needham, an attorney at Motley Rice, has filed complaints on behalf of more than 100 Morgan Stanley advisors. To him, the law is clear about what’s required under ERISA.

“An advisor’s compensation at a subsequent employer is irrelevant,” Needham said. “If ERISA governs Morgan Stanley’s plan, then the advisor’s benefits are vested and cannot be forfeited. Period.”

Arguments about double-dipping have failed before

This isn’t the first time, Needham noted, that firms have argued that advisors who received generous recruiting deals were trying to double-dip by fighting for deferred comp from their former employer. Wells Fargo raised similar arguments in a court battle with a group of its ex-advisors. 

In a decision in Berry v. Wells Fargo, the U.S. District Court of South Carolina disagreed with Wells’ contention.s. Wells settled the case in early 2020 for $79 million.

“The court in Berry v. Wells Fargo squarely rejected the same argument and we expect the FINRA panels will reach the same, correct conclusion,” Needham said.

But FINRA arbitrators are not bound by the same constraints that courts are. That can make the outcomes of arbitration cases inconsistent.

Morgan Stanley, for example, has seen mixed results when appearing before FINRA panels. In April 2024, the firm was ordered by an arbitration panel to pay more than $3 million claimed by seven advisors who had left for various firms. Likewise, two months later it was told to pay $1.1 million to a pair of ex-advisors who had joined Ameriprise.

But along with its victory earlier this month, Morgan Stanley also prevailed in cases that came down in February and January of this year, as well as one from June 2024. 

Merrill, meanwhile, emerged victorious in March in a court challenge brought by a former advisor who claimed he was owed more than $500,000 in deferred compensation after leaving in 2021. 

Edde said his general recommendation to advisors is to avoid firms where deferred compensation makes up a large part of the payment policies.

“The deferred comp thing in general, in my opinion, is so self-serving for these firms, it’s almost ridiculous,” he said. “I would never advise anyone to go where they knew part of their comp was going to be deferred, because all they are trying to do is lock these advisors in and make them less inclined or even prevent them from moving.”