For well-paid financial advisors, patience can pay. At many Wall Street banks, advisors set aside part of their income, which grows tax-free with interest, and collect it in retirement at a lower tax rate. This is a boon for banks, too, as they report lower compensation costs to their shareholders.
However, advisors usually have to forfeit this money if they leave for another employer before an agreed-upon number of years. Some fight back and sue for their due. For Ajamie LLP, a Houston law firm with 11 attorneys, taking on banks with billion-dollar war chests is becoming a booming business.
“If I could describe their mood,” said partner Jack Edwards of advisors, “they’re pissed. It’s their money, and the firm effectively stole it from them, and they want it back.”
Edwards is co-lead counsel on a headline-making class-action suit filed by ex-Morgan Stanley advisors. Though a federal judge sent the case to arbitration rather than court, he gave them a leg up by agreeing with their argument that Morgan Stanley’s deferred compensation plan is actually a retirement plan, which comes with stiff legal protections. This ruling was used by a lawyer on another case, Ohio-based Alan Rosca, to secure a $3 million judgment against Morgan Stanley on March 25.
“This is not a retirement plan, as prior arbitration panels have rightly decided, and we think the panel reached the wrong result,” a Morgan Stanley spokesperson told BI in a written statement. “We will continue to aggressively defend against meritless attacks suggesting otherwise.”
The ruling and the $3 million verdict have led to a flurry of interest, with Ajamie receiving at least a dozen inquiries a week from advisors and sometimes a dozen a day. Edwards has filed 15 arbitration claims on behalf of ex-Morgan Stanley advisors since February and expects more than one hundred combined two months from now. His firm filed a class action against Merrill Lynch in late April.
“We are confident the WealthChoice Plan is not covered under ERISA and that our compensation program complies with all relevant laws,” a spokesperson for Merrill Lynch told Business Insider.
The next target? Edwards declined to say. He said he has been contacted by advisors hailing from “really any financial firm that offers deferred compensation to financial advisors.”
Ajamie’s playbook for suing big banks
Before Edwards, 48, came to Ajamie in 2011, his legal career had a lot of twists and turns. After graduating from the University of Virginia School of Law in 2003, he started at Big Law giant Jones Day, where he never got to go to court. Bored, he went to a Texas firm to work on Supreme Court cases with future Sen. Ted Cruz. Laid off after less than a year due to the financial crisis, Edwards worked on lawsuits over defective products like car tires for a year and a half. After he tired of those “cookie-cutter” cases, he joined Ajamie.
The 26-year-old firm’s bread and butter are financial fraud and commercial disputes. Edwards’ first case involving financial advisors was a class action suit against Wells Fargo filed in 2015. At first, he argued that forfeiture violated Texas state law, but Wells Fargo’s compensation plan had a clause dictating that North Carolina law applied.
He found another tack: that the plan violated the Employee Retirement Income Security Act (better known as ERISA), a federal law that governs retirement and health plans in the private sector. This was the premise of a successful case against RBC Capital Markets decided in 2014.
The complexities of ERISA and these compensation agreements were intimidating, he admitted. Ajamie partnered with another law firm that specialized in ERISA.
Wells Fargo, unlike Morgan Stanley, did not contest that the compensation schemes were retirement plans. The bank did argue it was an exclusive plan that only applied to highly -paid employees. Wells Fargo settled with the advisors for $79 million in 2020.
During that suit, Ajamie was contacted by Matt Shafer, the lead plaintiff in the Morgan Stanley case. The Morgan Stanley suit inspired Kelly Milligan, now the named plaintiff in the Merrill Lynch class action, to reach out.
Is this a turning point for advisors looking to sue?
The judge’s order in the Morgan Stanley case has already helped another group of advisors secure a $3 million verdict against the bank. The bank has filed a motion to reconsider or clarify the ruling.
However, even if the ruling stands, it doesn’t guarantee the outcome of similar suits, according to Edwards.
First off, these disputes are often handled in arbitration, not court, as mandated by many employment contracts. These arbitrations are dealt with by the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulator. They don’t establish legal precedents, and FINRA arbitrators do not have to follow the law when making decisions.
These ERISA arguments are also deeply complicated. Edwards has reviewed lists of potential panelists and is optimistic, but he acknowledged, “ERISA is as clear as mud.”
Many advisors are still nervous about pursuing legal recourse, according to Edwards. They have to weigh whether the financial award would be worth the hassle of litigation or possibly alienating their new employers, he said.
As to whether well-paid, educated advisors should be able to clawback their compensation after agreeing to these schemes, Edwards is firm.
“They would give a percentage of that commission, and then all of a sudden part of it became deferred, and then more was deferred,” he said. “They never had a choice. They didn’t bargain for this. It’s just been imposed upon them.”
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