Wirehouses fired fewer registered representatives in 2020 compared to the previous year, a Financial Advisor IQ analysis of data from regulators in the four most-populated U.S. states shows.
The Covid-19 pandemic and the widespread remote work environment it created may account for the dip in firings last year, industry recruiters, consultants and lawyers suggest.
But other reasons may have played a role as well. Some say working remotely may have made it harder to catch problematic behavior. Others say that it’s simply because stricter hiring standards in recent years have let fewer problem employees in the door.
FA-IQ reviewed Uniform Termination Notice for Securities Industry Registration — Form U5 — filings submitted to state regulators in California, Florida, New York and Texas, for each of the past three years.
Discharges of registered reps dropped 64% from 2019 levels to 105 individuals last year across Merrill entities, 27% to 197 across Morgan Stanley’s wealth group and 18% to 33 across UBS units, according to the data.
Wells Fargo entities saw an 18% uptick in such terminations to 176 last year, the data show.
Merrill attributes last year’s drop in discharges to measures taken to support employees during the pandemic, such as pausing performance hurdles, a spokesperson for the wirehouse says. The spokesperson notes, however, that the data from state securities regulators appear to show a higher number of discharges than the firm’s internal records, which include staff in a wide variety of roles.
Spokespeople for the other three wirehouses declined to comment for this article.
Job security amid a pandemic
Jennifer Trowbridge, a partner at Jacko Law Group, says the wirehouses may have been less likely to detect problems that could have led to terminations in the pandemic-induced remote working environment.
But, on the flipside, “employers faced an increased risk in employment-related lawsuits” in 2020, she says. “Terminating an underperforming advisor in 2018 would look much different than in 2020 because of the additional risk of possibly violating that employee’s coronavirus-related employment rights.”
The risks involved in firing during the pandemic include potential accusations of interference with the Family and Medical Leave Act, retaliation or wrongful discharge, according to Trowbridge.
“In some instances, employers may wait to terminate an underperforming advisor until the increased risk of coronavirus-related employment lawsuits decreases,” she says.
Jeff Nash, CEO of financial services consulting firm Bridgemark Strategies, says one reason the pandemic could have led to fewer firings is that it is “harder for people to get caught or get in trouble in a remote work environment.”
But there are areas that firms are especially “dialed into,” including digital signature violations, non-sales practices or firm policy-related violations, says Louis Diamond, president of recruiting firm Diamond Consultants.
While the dip in overall firings during 2020 is “quite surprising,” Diamond notes that most firms have grown stricter, adopting “zero-tolerance” policies toward compliance violations.
Improvements in wirehouses’ compliance technologies and hiring policies and procedures may have also played a role in tamping down the number of registered rep firings.
“The increased effectiveness of new technologies to assist compliance and supervision have previously identified problem situations, and the rogue registered representatives or bad actors have been excluded from firms,” says Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services.
It’s less likely than in the past to see the same registered reps terminated at multiple firms because of more stringent screening to weed them out, he adds.
In 2019, the Financial Industry Regulatory Authority put more resources into monitoring and examining high-risk registered reps and firms that tend to employ them. Then, last September, Finra proposed establishing time limits for registered reps seeking expungement of their industry records, which firms use to screen potential hires and investors use to check out people with whom they are likely to work.
Overall drops in the number of firings might also reflect changes in both the business models people are choosing as well as recruiting practices, says former Finra enforcement chief Bradley Bennett, who is now a managing partner at compliance consultant Vernon’s Gate Partners.
More people are gravitating toward the registered investment advisor model, resulting in less churn in other channels, Bennett says.
The RIA channel has been growing at a fast clip in recent years, with the total number of advisory firms climbing 3.9% to a record 13,494 in 2020, according to a study last year by the Investment Adviser Association and National Regulatory Services. The aggregate regulatory client assets in the channel has nearly quadrupled since 2001, when IAA and NRS first compiled the report.
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