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Morgan Stanley Bars Ex-FA from Soliciting Her Clients

By Miriam Rozen May 13, 2019

Wirehouse Morgan Stanley last week won a temporary court injunction against Julie Knight, one of its former financial advisors. Knight jumped ship in late April to Philadelphia-based Janney Montgomery Scott, allegedly receiving $1 million in incentives to make the move. The injunction bars Knight from soliciting Morgan Stanley’s clients and disclosing its records. The order will remain in place until a Finra panel issues a ruling in the case Morgan Stanley has filed against Knight in that forum.

But the legal battle already has exposed allegations by Knight that she left Morgan Stanley because of a “shifting culture and environment” unfavorable to working mothers. Specifically, Morgan Stanley management did nothing to stop her business partner from punishing her for taking maternity leave by stripping her of all compensation credit for their co-developed clients’ revenues, alleges Knight, who worked at the wirehouse for nine years.

At Morgan Stanley, her business partner “openly questioned my choice to have children and unilaterally reduced my business share on future shared institutional client accounts from 50/50 to 100/0 following my return from maternity in 2014,” Knight alleges in an affidavit. When she complained to a Morgan Stanley complex manager, he replied with a “devastatingly nonchalant non-response,” Knight alleges. He told her diversity issues had arisen at other Morgan Stanley complexes, “not just my geographic area,” Knight alleges. Knight’s business partner is a 19-year FA veteran with nine years at Morgan Stanley.

“I wanted no part of a firm that would strip me of my book of business by diverting a substantial portion of my revenue stream to a preferred male advisor, simply because I decided to have children. I also wanted no part of a firm that ignored my concerns about discriminatory behavior, as if that conduct was a normal and accepted part of the culture,” Knight writes in her affidavit. Her move to Janney allows her to service clients in a “more family-friendly, client centered environment,” she writes.

On May 6, prior to Knight filing her opposition and affidavit, a federal court granted Morgan Stanley’s request for the temporary injunction and also ordered Knight to deliver $50,000 as a security at the time of a hearing scheduled four days later.

On May 9, the day before the hearing was scheduled, Knight and Morgan Stanley agreed to a stipulated order that canceled the hearing the next day and kept the temporary injunction in force until Finra issues a ruling, but also waived the requirement that Knight provide the $50,000 in security.

Morgan Stanley’s spokespersons did not provide a comment for this story. Knight’s lawyer did not return a call.

But recruiters, including ones who help other firms poach FAs from Morgan Stanley, expressed interest in the legal battle and all the issues it raises.

“Ms. Knight is alleging that the head of her team unilaterally changed her deal and that the Morgan Stanley complex manager refused to get involved to rectify the situation. Unfortunately, I’ve heard of other instances like this throughout the industry. That’s because many branch managers are often primarily concerned with keeping big producing advisors happy and don’t care that much about junior team members. A best practice is to have all revenue splits codified in a team agreement which the firm has signed off on. Many advisors use sales coaches to put these agreements together,” Mark Elzweig, a recruiter and president of the Mark Elzweig Company in New York, writes in an emailed response to questions for this story.

Although he questions how Knight’s business partner could have “unilaterally” changed their split of client revenue credits without getting Morgan Stanley management’s pre-approval, he empathizes with her and is often frustrated by what he views as the wirehouses’ bullying approach against exiting FAs, says Danny Sarch, a recruiter and president of Leitner Sarch Consultants in White Plains, N.Y.

By obtaining the TRO against Knight, Morgan Stanley has gained an advantage, Sarch says. “They delayed the transfer of the accounts and gave their own advisors the chance to win the hearts and minds of those clients,” he says.

But despite the TRO, Knight may now follow the lead set by other FAs leaving Morgan Stanley and UBS — both wirehouses that exited the Protocol for Broker Recruiting, an intra-industry pact letting FAs move themselves and their clients more freely between employers. Many defecting FAs from UBS and Morgan Stanley have established well-documented and scripted scenarios for identifying clients’ contact information from public sources and then telephoning those clients to inform them of their new professional whereabouts but engaging in those conversations without soliciting their business, Sarch says. “It’s a fine line,” he says, between FAs telling clients they've moved and soliciting them, but one that is possible to avoid crossing.

In her affidavit, Knight provides detailed descriptions of conversations she had conducted with clients as evidence that she had not crossed the line and engaged in solicitation of Morgan Stanley clients.

For its part, Morgan Stanley initially adopted a “very aggressive” legal strategy for pursuing defecting FAs after it left the Protocol in 2017 but then toned it down, says Sarch.

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Its recent battle with Knight, and other ones he’s heard about anecdotally may signify Morgan Stanley’s return to an aggressive legal strategy against defecting FAs, Sarch says. Or, it might simply reflect that in Knight’s case, she and a former partner had “a messy divorce,” Sarch says, which “adds an extra layer of complexity.” When two FAs have split, Morgan Stanley often sends the message, “We are going to defend the people who are here,” Sarch says.

In another case, Morgan Stanley has halted its pursuit of a permanent injunction against Jason Bottenfield and Brett Diamond, two FAs who each had $140 million under management when they left the wirehouse’s branch in the well-heeled Dallas neighborhood of Park Cities on March 15 for Raymond James Financial Services-affiliated RIA Steward Partners Global Advisory.

In late March, a Texas state court rejected Morgan Stanley’s request for a temporary injunction against Bottenfield and Diamond. But initially the wirehouse responded by doubling down and requesting a permanent injunction, hoping the Texas court would reverse its views, as FA-IQ reported.

But since then the two defecting FAs and Morgan Stanley have told the Texas state court that on April 12 they had reached a confidential agreement and no further hearings were necessary, prior to a ruling in the Finra case that the wirehouse had filed against Bottenfield and Diamond.