A prominent group of former Merrill advisors is firing back in court against what they call “meritless” allegations that they conducted a corporate raid on the wirehouse when leaving to set up their own firm with Dynasty Financial Partners.
The advisors, who had helped to manage $129 billion in client assets as part of Merrill’s Global Corporate & Institutional Advisory Services (GCIAS) team in Atlanta, contended in a legal filing Friday that they followed industry standard practices when leaving Merrill to start a registered investment advisory called OpenArc Corporate Advisory. They also accuse Merrill of unfairly placing them on administrative leave before their departure, failing to reinvest in its business and ignoring the $22.5 million they say they paid over the course of five years to buy their book of business.
Merrill filed suit in federal court in Georgia this week not only against the former GCIAS team and OpenArc but also Dynasty Financial Partners and Charles Schwab. Dynasty is a large wealth management network that provides various support services to RIAs, and Charles Schwab was chosen as OpenArc’s custodian for the safekeeping of client assets.
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Advisors’ defense against ‘raiding’ allegations
Among other violations, Merrill accused the OpenArc advisors of “raiding” its business in the Atlanta suburb of Peachtree City. Raiding is essentially a charge of unfair competition leveled against defendants accused of trying to take a rival’s entire business in a particular geographic location or area of expertise.
With $129 billion in play, the former Merrill team’s departure could be the largest wirehouse breakaway of all time. But it’s not clear that all of those assets will transfer. Many are in retirement plans or stock-compensation funds, making them harder to move than assets in regular advisory accounts.
But the prospect of losing the bulk of that business was dire enough to galvanize Merrill into legal action. Merrill’s complaint alleges that the defendants conspired to poach not only employees and support staff but also thousands of corporate and individual clients. Merrill separately filed a request for a temporary restraining order that would bar the departed advisors from using any of Merrill’s confidential and proprietary information and trade secrets and from soliciting any of Merrill’s clients for a year.
The OpenArc advisors’ response asks the federal court in Georgia to reject Merrill’s TRO and require the dispute go before an arbitration panel administered by the Financial Industry Regulatory Authority, the broker-dealer industry’s self-regulator.
In response to the claims of a corporate raid, the advisors point to a recent case decided by the Fourth Circuit Court of Appeals, Salomon & Ludwin v. Winters, which found those sorts of accusations can’t be leveled against employees who leave a company to start a rival firm. The former Merrill advisors argue they were part of a single team that left to form their own business, OpenArc, rather than being recruited by a competitor.
Accusations of ‘bad faith’ and failure to reinvest in the business
The OpenArc advisors also say Merrill was aware of their departure plans before they left. Merrill’s head of private wealth management, Greg McGauley, “begged” them to stay, according to their filing.
They contend Merrill then acted in bad faith, putting them on administrative leave on Tuesday without cause or warning and prohibiting them from contacting clients. The advisors also said Merrill “secretly devised a plan to unfairly compete, deliberately harm their reputations and drag them through the mud in the press,” by releasing the lawsuit to the press hours before notifying their counsel.
They also accused Merrill of failing to invest meaningfully in their business division over the past five years, leading to outdated technology and “staggering losses of clients.” A declaration submitted by one of the advisors asserted that an internal assessment found that more than $150 million needed to be spent but even that would not “meaningfully address the root cause of (Bank of America’s) challenges,” and that the business had lost more than 100 equity plans, leading to an eventual loss of $45 million in revenue.
What was that $22.5 million for?
The OpenArc advisors said they together paid Merrill $22.5 million between 2020 and 2024 to buy their book of business — essentially the right to continue servicing their clients after leaving. In court declarations, several of the departed advisors said they paid this “incredible sum of money” in the understanding that it would enable them to take their clients with them under the protection of the Broker Protocol, a voluntary industry pact setting strict limits on what types of data advisors can move from one firm to another.
A Merrill spokesperson responded by saying that what the departed advisors were actually paying for was the right to take over client relationships from colleagues who were retiring.
“Consistent with industry practice and contrary to these false claims, clients from retiring financial advisors were transitioned to other members of the team and they were compensated as a result,” the spokesperson said. “The advisors actively participated in the program, resulting in increased compensation over time.”
Merrill also contended in its initial lawsuit that the advisors did not build their books of business on their own.
“The individual defendants typically did not prospect new clients,” it argued. “Instead, they generated six- and seven-figure incomes from the downstream business derived from institutional clients already working with Merrill and internal referrals of potential clients from other segments of the company.”
Broker Protocol considerations
Merrill’s initial complaint also questioned whether the Broker Protocol provides protections to not only the departed advisors but also Dynasty Financial Partners and Charles Schwab. It alleged, for one, that Dynasty violated the protocol by encouraging the advisors to provide it with customer information before they resigned. The complaint also claims that Dynasty then shared this information with Schwab, which does not belong to the protocol.
In their response, the OpenArc advisors submitted sworn testimony asserting that they did not violate the protocol by removing confidential information or soliciting Merrill clients before their resignation.
