A recruiting case involving two former Wells Fargo representatives is showing the risks advisors run when they accept recruiting incentives that offer equity in their new firm rather than upfront cash.
Rick Fuchs and Graham Heck, both advisors in the Austin, Texas, area, left Wells Fargo in 2020 to join Steward Partners Investment Advisory, a registered investment advisor with its main offices in Washington, D.C. A lawsuit filed on Sept. 28 in federal court for the Western District of Texas states the pair were induced to leave in part by a recruiting deal offering them equity shares in an affiliate company, Steward Partners Management Holdings. The legal action, first reported by AdvisorHub, seeks unspecified damages for alleged violations of the Securities Act of 1933.
When being recruited in 2019 and 2020, Fuchs and Heck were offered shares priced nominatively at $17.50 a piece. Their suit alleges, though, that they were repeatedly assured by Steward Partners representatives that the true value was between $20 and $25 a unit.
Partly for that reason, Fuchs, Heck and four other members of their advisory team decided to move to Steward Partners at the beginning of October 2020. In return, the firm provided shares to the advisors; Fuchs received 118,609 shares.
At $17.50 a share, his equity offering was valued at roughly $2 million. But using the $25 a share upper limit he said was quoted to him by the Steward Partners recruiters, he believed the real value to be as high as nearly $3 million, according to the suit.
Heck similarly received 31,416 shares ostensibly worth $549,780. But at the $25 price limit, their actual value would be $785,400.
The deal began to unravel in December 2021 when the third-party firm Certent issued a report placing the actual value of the shares at $13.22 a unit. Fuchs and Heck's lawsuit alleges that such misrepresentations "are part and parcel of Steward's regular business practices."
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Attempts to reach Steward Partners were unsuccessful. The firm has said in the past that it doesn't comment on legal disputes as a matter of policy.
A pair of industry recruiters agreed the case shows that advisors often do not fully appreciate the risks that come with recruiting deals that offer equity rather than cash. Jody Papike, the
Pitfalls to look out for, she said, include clawback clauses that allow the firm to recoup some of its recruitment incentives and noncompete clauses that might prevent advisors from soliciting former clients if they eventually leave for a competitor. Papike said advisors should also be aware that equity offerings usually only increase in value if the firm does well.
"So your future isn't necessarily based on your individual performance," she said. "It's based on the entire group's performance."
Phil Waxelbaum, the founder and CEO of Masada Consulting, agreed that a consultant or lawyer should be tapped to look over any equity deal advisors are thinking of taking. Waxelbaum said the trouble with equity is that its true value is often obscure. Planners should always ask how shares are being priced and whether there are any restrictions on taking their money out.
They also, Waxelbaum said, should seek to ensure there are provisions that prevent their employer from issuing more shares in a way that would dilute the value of their own equity.
"If there is no anti-dilution provision, it's a bad deal," Waxelbaum said.
Robert Linkin, a partner at the Dallas-based firm Munck Wilson Mandala who's representing Fuchs and Heck, declined to comment.
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According to their suit, Steward Partners began complaining in January 2022 that Fuchs and Heck's team was not doing well enough to support its recruitment package — even though that deal was never meant to be tied to performance. "Apparently in a cash crunch," the suit states, Steward Partners called the pair into a meeting and told them they were fired.
Fuchs and Heck later reestablished their employment only by agreeing to pay back two-thirds of their shares in Steward as well as $1 million from a signing bonus they had received on joining the firm, according to the suit. Both Fuchs and Heck have since left Steward Partners and are now registered with LPL Financial.
