Airgead Clann, a California independent investment advisor, announced plans to proceed with a FINRA arbitration against Charles Schwab regarding the abrupt termination of an investment manager service agreement in October.
According to Airgead's founder, Michael Kelly, the company alleges Schwab violated privacy policies between advisors and their clients.
Although it is common for financial services' companies to terminate contracts at any time, the way the termination process occurs is rarely outlined. In Airgead's case, the termination began with a phone call from Schwab’s corporate counsel informing him his investment manager service agreement was to be terminated. “I thought I was being pranked, I thought it was my son playing a practical joke on me,” Kelly said.
Susan B. Forman, a spokesperson for Schwab, said in an interview Friday that Kelly was contacted by Schwab Advisor Services’ compliance department prior to the termination and was “well aware that compliance was investigating his conduct.”
Kelly alleged that an hour and a half later, he received a faxed letter of termination as well as a copy of the letter Schwab would be sending to the clients and holders of his approximately 80 Schwab accounts, informing them of his agreement termination. A mailed notification letter arrived soon after, without giving Kelly a reason for the termination or a way to fight or discuss it.
Forman said: "It was true that Kelly received an official letter, and that is standard protocol in terminations. Terminations are a serious matter and they are not taken lightly."
The letter to the Schwab account holders, which they received in October, stated they had until Jan. 3 to decide if they wanted to transfer their account back to Airgead, or continue as a Schwab client. However, becoming a Schwab individual investor would subject clients to the Charles Schwab Pricing Guide, which included additional fees.
After receiving the letter, Kelly said many of his clients went into a panic. "That’s the worst part of it from a client’s perspective," he said. "They get scared and go right into panic mode, calling for explanations."
After pressing Schwab’s attorney for answers, Kelly was told the reason for his termination was “impersonation of a client.” But Kelly said that he isn't buying it. He believes his agreement was terminated because he wasn’t a top-producing advisor. “I wasn’t a client, I wasn’t buying Schwab funds, I wasn’t making them money,” Kelly said.
Forman said that in Schwab's formal response to the FINRA arbitration, the company discovered that Kelly had impersonated a client as part of an attempt to validate a questionable signature on a client form that his company submitted to Schwab. Forman said that Kelly's impersonation attempt was captured on a recorded telephone line and he admitted that he had done it to Schwab.
"The driving principal that governs our actions is our commitment to protecting the security of end client assets. … Any conduct that is contrary to our procedures trigger an investigation and in this case that investigation ended with a termination," Forman said.
Kelly’s dissatisfaction has led him to launch a campaign to educate other advisors. When Kelly informed Schwab he was moving ahead with the FINRA arbitration, Kelly said Schwab engaged him in some settlement talks and, according to Kelly, was prepared to offer up to five figures. But Kelly rejected the settlement because he wants to be compensated for the lost revenue on the $14 million he had in assets under management.
Forman said Schwab has been encouraging mediation in hopes a neutral third-party can help resolve this dispute, but no settlement offer has been made.
Kelly said: ”I hope Schwab changes their protocol, that they admit wrongdoing and send an amendment to every advisor on their platform saying this is what they can do if they do terminate. Come clean, be up front, and compensate me."