Merrill accuses Schwab, Dynasty of raiding $129B team

Merrill is accusing a group of ex-employees formerly helping to manage $129 billion, along with Charles Schwab and Dynasty Financial Partners, of carrying out a “pre-meditated corporate raid” of its offices in Atlanta to form a new advisory firm.

Merrill’s suit accuses 12 former employees in its Global Corporate & Institutional Advisory Services group of conspiring to take a large part of that business away. GCIAS consists of roughly 90 advisors who help corporations and ultrahigh net worth clients with retirement benefits, stock-plan compensation and financial advice for employees.

The breakaway team, which operates out of the Atlanta suburb Peachtree City, is opening an advisory firm called OpenArc in affiliation with Dynasty, which provides various types of support to advisors who leave wirehouses and other firms to start RIAs. It wasn’t clear how much of the $129 billion managed by GCIAS, consisting mostly of assets in retirement plans, the former Merrill advisors are taking with them. It also wasn’t clear how many employees would follow the departing team.

The group consists of senior managing partner Erik Bjerke and managing partners Jeff Crowell and Jim Kaufman, along with Chad Pigg Fife, Emily Fletcher, Brittany Hartnett, Kevin Higginbotham, Jeffrey Neumeyer, Steven Prediletto, Joseph Sacco, Michael Sontag and Elizabeth White. Their new firm has enlisted Charles Schwab for custodial services such as holding client assets for safekeeping.

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Merrill’s complaint alleges that the defendants conspired to poach not only employees and support staff but also thousands of corporate and individual clients, causing serious and irreparable harm to the company. The lawsuit seeks immediate injunctive relief, compensatory and exemplary damages, and legal fees.

“Dissatisfied with earning millions of dollars annually at Merrill, and while still employed at the firm, the Individual Defendants began conspiring with Dynasty and its shareholder and main custodial partner, Schwab, and taking steps to form a competitor entity, OpenArc,” according to Merrill’s complaint.

Dynasty issued a vigorous defense of its actions. It said it takes the prohibitions laid out by the voluntary industry pact known as the Broker Protocol “very seriously.”

The protocol allows departing brokers to take certain types of client information, such as names and addresses, to their new firm. Both Merrill and Dynasty are voluntary members of the Broker Protocol.

“We are also strong advocates for advisor and client choice and believe that leadership by fear is not a long-term strategy on how to retain the best advisors and serve their clients over time,” Dynasty said in a statement. “Fear will not dictate the actions of the most independent minded advisors who seek the best outcome for their clients, teams, and their families. Our focus remains delivering modern technology, flexible platforms, better economics, and world class service to our clients; the RIAs who trust us as their partners on their independent journey.”

Charles Schwab released a statement saying, “At Schwab, we hold ourselves to the highest standards of integrity, and our business practices are rooted in respect for individual choice and fair competition. Any allegations to the contrary are unfounded and we will defend ourselves against them. Our unwavering commitment to our clients remains our guiding priority.”

What is a corporate raid?

The term “raiding” lacks a precise definition in the wealth management industry, but it’s generally used to describe situations in which a group of employees leaves a firm en masse to start a competing business, often taking a significant portion of the original firm’s clients and assets with them. Industry experts have tried to set an exact percentage of assets and clients that have to be removed — often put at between 30% and 50% — for “raiding” claims to have any chance of success in court. More than that, though, lawyers will look at whether one firm’s actions seem intended to take away a rival’s entire business in a certain geographical location or area of expertise.

“Through the spread of misinformation and strong-arm tactics, the Defendants already have conspired to poach Merrill’s GCIAS business, including 170 financial advisors and support staff assigned to support GCIAS, and thousands of corporate and individual customers receiving services from or through GCIAS,” according to the complaint.

Raiding cases can result in some big fines if firms are found culpable. In December, a Financial Industry Regulatory Authority arbitration panel hit Raymond James and three recently recruited advisors with $5.2 million in compensatory and punitive damages for allegedly raiding a Baird branch office in Reston, Virginia. In 2023, a separate FINRA arbitration panel ordered Raymond James and another of its advisors to pay nearly $20 million over allegations that they had raided a Wells Fargo branch in Mount Home, Arkansas.

The alleged conspiracy

.According to the lawsuit, the alleged plot included:

• Soliciting employees: The defendants are alleged to have held meetings in Merrill offices and at the homes of senior leaders, including Kaufman, to convince other GCIAS employees to join the move. They allegedly offered financial and equity incentives and used scare tactics, such as baseless rumors that Merrill would shut down the GCIAS business.
• Misappropriating information: The defendants allegedly shared confidential and proprietary information about Merrill’s employees and customers with Dynasty and Schwab.
• Deception: Senior leaders, including Fletcher and Kaufman, allegedly misled Merrill by approaching the firm about entering its retirement program, causing Merrill to spend valuable time and resources designing special accommodations for them, all while they were “actively plotting” to leave.

The lawsuit further claims that Dynasty, in particular, provided various types of support to the defendants, including offering financial incentives, assisting with business formation, and helping with marketing and public relations. 

Merrill notes that the GCIAS advisors did not build their book of business primarily by going out and finding client prospects on their own. Most of its investors came from Merrill and its parent, Bank of America. JPMorgan has made similar claims in a series of lawsuits filed against private client advisors who have left it for other firms.

Merrill, in its suit, asserts, “The individual defendants typically did not prospect new clients.  Instead, they generated six- and seven-figure incomes from the downstream business derived from institutional clients already working with Merrill and internal referrals of potential clients from other segments of the company.”

The Broker Protocol

Although Merrill acknowledged both it and Dynasty belong to the Broker Protocol, it argues several reasons for why the pact doesn’t offer protections in this instance. It alleges, for one, that Dynasty violated the protocol by encouraging the defendants to provide it with customer information before they resigned. The complaint also claims that Dynasty then shared this information with Schwab, which does not belong to the protocol.

The lawsuit further contends that the protocol doesn’t apply because the defendants were moving not to Dynasty but to their own new RIA, OpenArc. The complaint states that by engaging in preresignation misconduct and sharing more information than the protocol allows, the defendants forfeited their right to its protections.

The lawsuit’s charges

Merrill Lynch’s complaint lists 10 causes of action against the defendants, including  misappropriation of confidential information and trade secrets, tortious interference, breach of the duty of loyalty, breach of contract, and unfair competition and raiding. Merrill is seeking a court order barring the defendants from using any of Merrill’s confidential and proprietary information and trade secrets, from interfering with Merrill’s business relationships with its clients and OpenArc advisors from soliciting any of Merrill’s clients for a year following their departure.