In the past five years, five of the nation’s biggest investment firms spent at least $40 million to settle complaints filed by investors against brokers who accepted a bonus to change companies
After 26 years helping his clients try to get rich, Indiana securities broker James Madden thought it was his turn to make a lot of money when a recruiter from Raymond James offered him $150,000 — nearly twice his annual income — to shift his business to the Florida-based company.
Madden said there was just one catch: Each time he failed to reach his sales quota in a three-month period, he would have to repay $7,500.
Six months after cashing in his windfall, Madden was in trouble. Business was down, and he had to give back $15,000.
Madden started making secret trades in client accounts to reach his sales targets.
Regulators later found unauthorized trades for at least 15 people and suspended his license.
Raymond James fired Madden and paid $36,000 to reimburse one of his clients, records show.
“I got seven kids and they are all in private schools and college — I was not prepared to give back $7,500 every quarter,” Madden said.
“If I was Raymond James, I wouldn’t want anybody to know about that (bonus) program. It is ridiculous. If my clients knew about that, they would have fired me, I am sure.”
For most brokers, getting a six-figure check to bring their clients to a new company is a moment to celebrate.
ARTICLE CONTINUES BELOW ADVERTISEMENT
But records obtained by the Star Tribune show that the strings attached to these rich packages have destroyed the careers of hundreds of brokers since 2012 and caused financial woes for some of their customers.
In the past five years, Minneapolis-based Ameriprise Financial, Wells Fargo and three more of the nation’s biggest investment firms spent at least $40 million to settle complaints filed by investors against brokers who accepted a bonus to change firms, records show.
Most of those complaints were settled in arbitration with no public disclosure.
“These bonuses are like the crack cocaine of the securities industry,” said Chicago lawyer Andrew Stoltmann, past president of the Public Investors Arbitration Bar Association, a trade group that promotes stronger consumer protections.
“They lead to a whole lot of chicanery in the industry because there is extraordinary pressure to pay those things off.”
Paying bonuses to recruit top performing brokers and their clients is not a new practice among investment firms, but a booming stock market and aging workforce have made the competition more intense and expensive than ever.
Recruiting packages in the six figures are now typical.
Ameriprise, the nation’s fifth largest investment firm, spent $152 million on recruiting in 2017, nearly triple what it spent in 2010, according to records filed with Minnesota regulators.
Wells Fargo, Ameriprise and other investment firms declined several requests to discuss their recruiting practices.
In written statements, the firms said they do everything they can to help newly recruited brokers succeed. Wells Fargo and Ameriprise said they also take prompt action if one is accused of harming a client.
ARTICLE CONTINUES BELOW ADVERTISEMENT
“We want every financial adviser at WFA to be successful while working in their clients’ best interests,” Wells Fargo, which has more than 19,000 advisers, said in a written response to the Star Tribune’s inquiries.
Cathy Hill, a Chicago investor who said a broker depleted her account, said, “I worry about my future. ... It’s just terrible.”
Ameriprise, which has nearly 10,000 financial advisers, said it is “misleading” to focus on “the very small percentage of advisers who have left our company due to performance issues or violation of the polices we have in place to protect clients.”
At the same time, Ameriprise and other investment firms successfully have blocked measures that would require them to tell customers if their brokers have received a bonus, even if it includes sales goals they must meet to avoid triggering penalties or risk losing their job.
Didn’t think twice
Chicago investor Cathy Hill said she didn’t think twice about following her new broker when he was recruited by another firm in 2013.
But Hill didn’t know that Wedbush Securities had paid him $2.1 million to move his business. Nor did she know that he would be paid a $135,000 bonus if he could generate $2 million in commissions in his first year from Hill and other clients.
Over the next five years, Hill’s lawyer alleges, broker William Mark Heiden depleted her account by $200,000. Most of those losses, according to her complaint, came when Heiden invested her money in an oil company that went bankrupt.
Hill said Heiden also executed trades without her permission, making risky investments that paid him fatter fees than the conservative products she preferred.
By the time Hill discovered that much of her nest egg was gone, 11 other customers had accused Heiden of abusing his position. Wedbush fired him in 2018 and has paid out nearly $2 million to settle claims of fraud and other misdeeds by Heiden, records show.
ARTICLE CONTINUES BELOW ADVERTISEMENT
Heiden, who is fighting to keep his license, blames his customers’ losses on a downturn in the oil market.
“I am not guilty of anything,” he said.
Hill worries that the financial hit she took could make it impossible to keep her home.
“I have these rolling panic attacks,” she said. “I worry about my future. I find it difficult to sleep. It’s just terrible.”
How brokers can make it
Here’s how a stockbroker could earn more than $1 million in commissions and bonuses or end up losing it all in just three years.
In this scenario, two brokers who make $200,000 a year accept large bonuses to switch firms, agreeing to pay back some of the money each year if they fail to meet certain sales goals.
Though called bonuses, the deals used to recruit established brokers are usually treated as loans. Repayment terms vary from one deal to another, but the loans are typically forgiven if brokers meet certain financial goals and stay with their new firms anywhere from five to nine years.
Brokers must pay interest on any unpaid balance of the loan and taxes on any portion that is forgiven.
If they miss a sales quota or fail to hit some other financial target, their commissions may be slashed or they may be forced to unexpectedly pay back thousands of dollars each month.
They also must repay any unforgiven amounts of money if they leave before the end of their employment agreements.
A former Wells Fargo broker in Georgia said he felt trapped after he failed to meet his production quotas and the company started docking his paycheck to recover $520,000 in bonus money.
ARTICLE CONTINUES BELOW ADVERTISEMENT
“It incentivizes you to make bad decisions and really do things that you normally wouldn’t do,” said the broker, who said he started selling his clients on investments that carried higher fees.
He quit less than two years after joining Wells Fargo and was ordered to repay more than $450,000 in bonus money in an arbitration proceeding, forcing him into bankruptcy last year.
Since 2012, financial services companies have filed more than 3,200 arbitration cases against brokers seeking repayment of recruiting-related loans, according to the Financial Industry Regulatory Authority, or FINRA, an industry-supported group authorized by Congress to protect investors.
Most cases are settled and all details, including the name of the broker and the firm, are never disclosed.
That can make it difficult to learn what ultimately happened to the brokers who received those recruiting packages, or whether problems associated with them are widespread or limited to a few firms.
Among the cases that ended with an arbitrator’s ruling, a pattern emerges: The company almost always wins, and the broker is ordered to repay hundreds of thousands of dollars in recruiting loans.
A review of 500 cases by the Star Tribune found that brokers in those cases owed an average of $236,472. A quarter of them ended up filing bankruptcy.
In more than 100 of the cases, the brokers also were fired or penalized by regulators for harming their clients, or their employers settled complaints for infractions linked to improper sales practices such as excessive trading.
Records show most of them had never had a customer complaint before being recruited.
ARTICLE CONTINUES BELOW ADVERTISEMENT
“I understand how these guys are romanced — when you see a seven-figure check coming into your bank account, you are blinded a bit,” said Brian Hamburger, a New Jersey lawyer who advises brokers on compensation issues.
“But these deals are overwhelmingly favorable to the companies. If a financial adviser is selling out for a big bonus, thinking they are going to outsmart the firm, they are sorely mistaken.”
How to avoid problems with your broker
• Check out your broker: Spot potential issues by reviewing your broker’s history at BrokerCheck. The searchable site will show whether your broker has been fired or disciplined, as well as the result of any prior complaints.
• Ask about incentives: Brokers are not required to share this information, but regulators recommend trying to find out whether your broker’s compensation arrangements require them to meet financial goals to avoid penalties, such as reduced commissions.
• Monitor your account: Review your trading records and make sure you have approved every investment. Watch for unusual amounts of activity. Ask your broker to explain any large losses.
• Watch for “happiness” letters: If your broker’s firm spots questionable trading, you will receive a letter asking you to sign off on recent transactions. You may not think anything is wrong, because such letters sometimes suggest the firm is simply making sure you are still “happy” with your broker.
• Keep records: If you ever get into a dispute, you will need to document your trading history. Take written notes on conversations with your broker, in case you need to dispute their representations about a specific investment.
Aaron Parthemer, who used to handle investments for a stable of NFL and NBA players, filed for bankruptcy after Morgan Stanley won a $675,000 arbitration award over his bonuses.
Regulators took his license for selling unregistered securities to his clients without taking proper steps to protect them.
“I went from the top to the gutter,” said Parthemer, who managed $250 million worth of investments. “Until this happened, I didn’t have a single complaint in my entire 20-year career. I was the poster child of how you do great business.
“And today, I get referred to as the Bernie Madoff of athletes. ... It makes me sick to my stomach.”
Phyllis Borzi, who as assistant secretary of the U.S. Department of Labor from 2009 to 2017 tried to limit bonuses for brokers who handle retirement plans, said she thinks most broker misconduct is caused by compensation practices.
“I think the overwhelming number of brokers who do bad things are not bad people,” said Borzi. “But the system is set up to reward that kind of behavior ... People believe their advisers are legally required to act in their best interests, and they’re not.”
Investment companies began using signing bonuses to recruit top brokers in the 1980s, and regulators began scrutinizing the practice by the mid-1990s, when brokers were being offered as much as a year’s pay to switch firms.
In 1994, the head of the Securities and Exchange Commission asked a panel of veteran financial industry executives to analyze compensation practices and recommend reforms.
A year later, the committee recommended eliminating upfront bonuses, noting that these undisclosed payments created conflicts that sometimes harmed investors. The recommendation went nowhere, recalled panel member Raymond Mason, former chairman and CEO of Legg Mason.
In an interview, Mason said he was astonished to find out that brokers are now getting packages worth more than three years’ pay.
“That is gigantic,” Mason said.
The SEC sounded the alarm about bonuses again in 2009. In a letter to Wall Street executives, then-SEC Chairwoman Mary Schapiro warned that large incentive packages could motivate brokers to “churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in an investors’ interest.”
FINRA tried to address the concerns by proposing that brokers be required to disclose any signing bonus of $50,000 or more.
The proposal was killed by the industry. Ameriprise said such disclosures could create “misperceptions” for customers and violate advisers’ privacy, records show.
Instead of requiring brokers to disclose the size of their bonus, FINRA began requiring firms to send out an educational letter, which includes questions that clients should ask if their broker changes firms and asks them to transfer assets.
“We think a customer should carefully consider whether to entrust his or her assets to a representative that is unwilling to be completely transparent with respect to conflicts of interest and other issues of importance to the customer,” FINRA spokeswoman Michelle Ong said.
However, if a client asks a broker about his or her signing bonus, the broker is not required to share any personal information, according to FINRA.
In 2016, the president of UBS Wealth Management decried what he called the industry’s “unhealthy obsession” with bonuses, noting in a trade publication that “relentless recruiting is bad for the industry.”
UBS subsequently reduced its recruiting efforts by 40 percent.
Edward Jones, one of the nation’s largest investment firms, has never offered signing bonuses. Katherine Mauzy, the executive in charge of recruiting, said Edward Jones doesn’t want to “handcuff” employees with long-term agreements that could lead to dissatisfaction and resentment.
“If (brokers) don’t want to be here,” Mauzy said, “let’s not force them to stay.”
‘They own you’
Not every broker who moves gets a bonus. Veteran headhunters involved in negotiating the deals say about 1,000 brokers receive large signing bonuses annually.
Ameriprise, which said it recruits about 300 brokers per year, said less than half of its recruits get money to switch firms. But the company said there are situations where the bonuses are important.
“Given the disruption to their practice when moving, many advisers experience an initial loss in revenue and a spike in overhead costs until they get settled into their new firms — and these funds are helpful in bridging that transition period,” Ameriprise said in a written response to questions.
Lisa Schesso said she agreed to join Wells Fargo in 2013 after the company offered her a bonus of $63,357. She was just starting to build her practice, and she said the company promised to let her manage $35 million in assets that had been handled by a colleague, who was leaving the firm’s branch in Hudson, Wis.
But the colleague refused to relinquish the accounts when he transferred, Schesso said, and she began to struggle.
In 2015, despite earning $29,331, Schesso took home just $7,567 after Wells Fargo took out its payments for her bonus-related loan.
Some months she earned nothing. In her previous job at a financial services firm, she earned more than $100,000 a year.
“I came home from work many times crying my eyes out,” Schesso said. “I couldn’t do it. I wasn’t going to sell something just because I needed a paycheck.
“But that does happen, obviously. Because when you are putting a commission in front of somebody who has to pay their bills, they are going to bend the rules. It happens every day.”
Schesso quit in 2016 and was ordered to repay $23,025 in bonus money after losing her arbitration case. She hopes to make her final payment this year.
She now works for another financial services firm, which gave her a $50 million book of business and guaranteed her $70,000 annual salary for 18 months.
Wells Fargo declined to comment, saying it considers employee information confidential.
In interviews, brokers said the companies tend to win no matter how things turn out. If a broker succeeds, as many do, the firms get new clients and revenue.
If the broker fails, the companies usually can hang onto the clients while filing arbitration claims against their former employees to recoup bonus money.
“When they give you that check, it’s more money than you’ve ever seen in your life,” said Scott Capone, a New York broker who had his securities license indefinitely suspended in 2016 for not repaying Morgan Stanley the unpaid balance of his $550,000 signing bonus.
“You feel this euphoria. But it’s calculated on their end. ... They know they own you.”
Many brokers said their inability to meet bonus-related obligations meant the end of their careers.
Some found lucrative new work. Joshua Maddux, who quit Morgan Stanley’s Minneapolis office in 2011 when he couldn’t repay $15,000 in taxes on his $287,000 bonus, is now earning more than $100,000 a year working on oil rigs in North Dakota and Utah.
“It’s not easy to begin a career again at 45 when all of your expertise is in financial services,” Maddux said. “You find yourself wondering, ‘How did I get here?’”
But many brokers have struggled to make ends meet. Too old to start fresh in many lines of work and unable to continue working in finance, some brokers end up in much lower-paying jobs.
One told bankruptcy court officials that he now mows lawns in Connecticut. Another fills online orders at a warehouse in Arizona for $12 an hour.
Several are selling cars.
“I had a 20-year career and I wound up delivering pizzas and driving for Uber,” said a former broker in Minnesota, who went bankrupt after he was unable to repay more than $200,000 in bonus money.
“It certainly wasn’t the career I expected.”
Richard Ohrn was managing more than $100 million for his clients in Florida when Wells Fargo offered him $430,000 to switch firms in 2011.
Within months, Ohrn’s career was in tatters. Former colleagues were bad-mouthing him. Customers accused him of cheating them.
He narrowly missed out on another $430,000 bonus, before Wells Fargo fired him and demanded that he return the first payment.
In a desperate attempt to escape mounting legal and financial problems, Ohrn faked his own death. He rented a boat and abandoned it off the coast of Palm Beach County after smearing the deck with his blood and leaving behind a pair of broken eyeglasses.
He later pleaded guilty to a felony for willfully communicating a false distress signal and spent a year on probation. He also must pay $1 million to cover the government’s search costs.
Regulators revoked his license for forging the signatures of several clients and stealing $15,250 from two elderly customers.
In an interview, Ohrn maintained that he never did anything to intentionally harm a client. As with many brokers whose careers ended after taking a signing bonus, Ohrn believes he became a victim of his own success — someone whose client portfolio became more valuable to employers than he was.
“I didn’t run because I stole money,” Ohrn said. “I ran because I lost everything and I was afraid to start over.”