Secrets of the Wirehouse: Garden Leave Skirts Laws

I learned a new term recently, Garden Leave. It’s a term associated with a brokerage firm so it struck me as odd that I didn’t know what it meant, turns out it’s relatively new and yet another Secret of the Wirehouse.

Why anyone would remain working at a brokerage firm is beyond me, they are controlling, manipulative organizations that have only their own interest in mind (not that of the broker or the client). Garden leave policy is just another example of behavior that a fiduciary would never put up with.

Every year hundreds of brokers switch firms. When they do this they attempt to bring the client base they’ve built with them.  Brokerage firms don’t want their brokers to leave and so place barriers in their way (as opposed to providing the best possible work environment) to lower the probability they’ll be able to retain the book of business. In my last post I discussed how Merrill Lynch is considering requiring older brokers to team up with newer brokers, they are doing this so that the newer broker forms a relationship with the older broker’s clients and can hopefully retain those clients if the older broker leaves. Garden leave is the next barrier a brokerage firm will use and a recent report suggest Merrill is looking to add this potentially illegal policy to their arsenal.

Garden leave is when a broker leaves a brokerage firm and attempts to bring his/her clients with them to the new firm, the brokerage firm being left uses an employment manipulation to prevent the broker from soliciting their client base.  In a recent story on AdvisorHub, it was described this way:

Just as a little background, it’s a slang term for period of time off you are required to take before you leave your current firm and start to work for your new firm.  You may also see it written as “gardening leave”.  Why call it that?  As the name implies, it means you have plenty of time to work on your garden at home before you can start your next job.  

It is just an amount of advance notice you AGREE to give your current employer before starting work at another firm.  Although new to advisers at the big wirehouses, it has been a common feature in home office and field management positions for some time.  Generally the higher or more sensitive the position, the longer notice required. Ever wonder why your branch/complex manager disappeared but didn’t show up at another firm for about 90 days?  Gardening Leave.  Why did senior executives going from one firm to another in the last several years not show up at the new firm right away? Gardening Leave. 

Keep in mind most states won’t let an employer say you must be unemployed for 30, 60, 90 days.  Right to Work laws take care of a lot of that.  So what happens is you submit your resignation, the firm says, “Thanks for the heads up; You can go home for 30/60/90 days and we’ll keep paying your salary. You are prohibited from contacting anyone at work or engaging in any work activities.  Enjoy your time off.”  Then they will cut off your access to everything.  But they won’t terminate you because if they do that, then you generally have the right to seek immediate employment.  

So your first problem is other advisers contacting your clients with no contact from you to rebut anything they say. But I think the bigger problem, and from all the notes on here it seems Mother Merrill is getting real good at this, is they may have up to 90 days to comb through everything you have done looking for something to tag your U-5 with and you won’t even be around to defend yourself. At that point Merrill could even announce they intend stay in the recruiting protocol and it just won’t matter.  So what if you can leave with a list of clients you have not been allowed to speak with for 90 days?

If Merrill pulls this off, it will be a GAME CHANGER in recruiting and retention.”

This policy is a clear way to circumvent the law and destroy the book of business a broker has developed as well as an attempt at destroying the broker’s life. Without getting into the ethics of who owns the client, this policy strikes me as complying with the technical details of the law, but not the spirit. It seems to me this will be taken up by the courts, but it needs a law change. There is a trend of brokers leaving their firms to start fiduciary based firms and companies like Merrill are attempting to prevent such moves, which ultimately leads to more people not under a fiduciary standard.

Scott Dauenhauer, CFP, MPAS, AIF


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