Ask Brad: What if My Broker-Dealer Terminates Me?

A broker can make a transgression in their personal life that did not affect their practice or clients. Yet they are terminated, with the abrupt pivot damaging their livelihood and reputation beyond repair.

Or, as someone told me recently, a broker’s client accused them not of losing money but of not earning the client a higher return. After an expensive fallout, the broker was shown the door by their firm.

There are two sides to every story. And there are bad apples that need to be exited. But it’s worth considering the unequal playing field in a broker termination decision.

On one side of the table is the broker. Their livelihood and career are tied to a single dance partner. Countless times they’ve explained to existing and prospective clients why they are with their firm and how their partnership creates the best resources to support their clients.

If the broker is abruptly terminated, they are forced to rapidly conduct a due diligence process on alternative firms or affiliation models. That process, under normal circumstances, plays out over months, not weeks or days.

Even if the broker locates a suitable partner, the chosen firm might not be willing to affiliate with them due to the higher risk of onboarding a “terminated” advisor. Further complicating the process, the broker’s prior firm can take up to 30 days to file U5 language, which the new firm will often want to review before making a final onboarding decision.

As this urgent search and due diligence process plays out, the broker’s clients are in limbo. They will be notified and potentially solicited by brokers newly assigned to their accounts. If clients contact their (now prior) broker, the broker is forced to explain an abrupt departure from a firm they potentially spent years praising. They likely cannot clarify where they’ll land going forward, and when they can service clients again.

Under such circumstances, a broker’s practice can be decimated. An entire life’s work is reduced to nickels on the dollar. A termination decision results in catastrophic circumstances for the broker.

Now consider how this impacts the brokerage firm, perhaps one of the traditional W2 firms with 10,000+ brokers. Even a top-producing broker contributes a microscopic fraction of the firm’s overall revenue at such a large firm.

No firm would allow the actions of a single broker to damage, let alone sink the firm. If there is any doubt about the regulatory, financial, or reputational harm a single broker could inflict on the firm, it will not hesitate to terminate the broker. After all, even losing the largest broker of the 10,000+ will not have a material impact on the firm's viability.

Put bluntly, every broker is expendable.

But Brad, the broker could sue the brokerage firm for damages if their termination was unwarranted.

Yep, they sure could. But consider how that plays out.

Scrambling to file a lawsuit does nothing to alleviate the possible exodus of the broker’s clients as I described above.

Most lawsuits take years to reach fruition. As that lengthy process ticks by, the broker’s livelihood and ability to support their family and maintain some semblance of their lifestyle hangs in the balance. Meanwhile, their former firm continues with the strength of 10,000+ other revenue-generating brokers.

What if the broker sues for millions of dollars? Maybe it works out for the broker if they win? That might happen, but by the time the check hits their account, they’ve lost a substantial amount of their income, have had to cover tens if not hundreds of thousands of dollars in legal costs, and their personal and professional reputation has been dragged through the mud (remember those tabloid articles I mentioned?).

And what was at risk for the brokerage firm during this process? They likely added to their legal reserves for a potential settlement, greenlighted the expense of their legal team to defend the case, and prepared their executives for the potential inconvenience of having to testify at an arbitration at some point.

Firms of this size do not fear being sued. A settlement that would be significant from the broker’s perspective is insignificant to it. It will not risk any single broker inflicting regulatory or reputational damage to the firm. It has the financial and legal resources to ride out any potential fallout from the broker suing.

A potentially catastrophic termination for the broker is simply a cost of doing business for the brokerage.

Brokers should never overlook the imbalance of power between them and their brokerage firm.

Every year, we witness the excommunication of brokers who have committed indefensible acts. I lend no defense to them nor show any sympathy.

But what about the ones terminated in a more subjective grey area? I’ve talked to several over the years. A common trait is that they had seen other brokers terminated over the years but always assumed it would never be them. Before you make the same assumption, just know none of them thought so either.

My intent here is not to instill fear. The number of brokers terminated yearly is a small fraction of the profession. That statistic, though, provides little solace for the affected brokers.

Are you the captain of your ship, or could you walk the plank of another?

Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.

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