GuideFiled April 19, 20225 min read

What Happens to Your Deferred Compensation When You Leave Your Firm?

Every wirehouse advisor carries a deferred compensation balance, and most have never calculated what resigning actually forfeits. Here is how the plans work, what the Wells Fargo settlement and the Morgan Stanley lawsuit mean for the forfeiture question, and how to think about the number before a recruiter does it for you.

Filed by Robert Noe

Deferred Compensation When Leaving a Firm: Advisor Guide

The short answer: At most major firms, unvested deferred compensation is forfeited when you resign, especially for a competitor, while vested balances pay out under the plan's terms. The forfeiture is usually the single biggest cost of a move, which is why competitive recruiting packages are sized to offset it, and why the first step of any transition analysis is a tranche-by-tranche forfeiture schedule.

Every wirehouse advisor carries a deferred compensation balance. Remarkably few have ever calculated what resigning actually forfeits, tranche by tranche, date by date. The firms are counting on that.

Deferred compensation is the most effective retention technology the employee channel ever built. It is also, right now, the subject of litigation that asks a genuinely unsettled question: whether the forfeitures at the heart of these plans are even lawful. Both halves of that sentence belong in any advisor's transition thinking in 2022.

Why is deferred compensation designed the way it is?

The mechanics are straightforward. Each year, the firm withholds a slice of the advisor's production, credits it to deferred awards, stock units, cash plans, or both, and vests those awards over a multi-year schedule. Resign before vesting, particularly for a competitor, and the unvested balance is forfeited.

Three design features turn that simple structure into handcuffs.

The deferral rate rises with production. The more successful the advisor, the larger the share of compensation deferred, and the larger the balance perpetually at risk. The firm's best people are, by design, its most expensive people to leave.

The schedules are long and rolling. Six-year vesting is common; in the plan now being litigated at Morgan Stanley, awards split roughly 75 percent into a six-year plan and 25 percent into a four-year plan. Because a new award is granted every year, a new clock starts every year. There is never a moment when nothing is unvested.

The balance compounds quietly. Individual awards feel small. A decade of them, marked to a rising market, does not. Advisors who finally build the schedule are routinely surprised by the total, which is precisely the experience of the plaintiff now suing Morgan Stanley, who says nine years of awards left more than $500,000 on the table when he resigned.

As one industry observer put it years ago, and it has only become more true, deferred compensation serves as the firms' ammunition, a way to control behavior and keep advisors in their seats. The design is not subtle, and it is not meant to be.

Is forfeiting deferred compensation legal? The litigation

For most of the industry's history, forfeiture-on-resignation was simply the water everyone swam in. Two cases have put it on trial.

Wells Fargo settled. In February 2020, Wells Fargo agreed to pay $79 million to resolve a class action, brought on behalf of roughly 1,400 current and former advisors, alleging that its plan's forfeiture provision violated ERISA's vesting and non-forfeitability rules. Wells argued its plan was an ERISA-exempt "top-hat" plan for a select group of highly compensated employees. The settlement paid the class without forcing Wells to change the forfeiture terms, which tells you both that the claims had teeth and that the industry was not ready to concede the design.

Morgan Stanley is fighting. In December 2020, former Morgan Stanley advisor Matthew Shafer filed a putative class action in the Southern District of New York arguing that the firm's FA Deferred Compensation Program is an ERISA pension plan, and that cancelling unvested awards when advisors leave violates ERISA's anti-forfeiture protections. Morgan Stanley moved in May 2021 to push the dispute into arbitration, and the procedural fight over where the case will even be heard has consumed its first year; an amended complaint adding more former advisors was filed in late March. The core question, is the plan governed by ERISA at all, remains undecided as of this writing.

Advisors should read the litigation for what it is and is not. It is a serious challenge to the industry's most important retention mechanism, worth watching closely. It is not a reason to plan as if forfeitures will be struck down; no court has ruled, appeals would follow any ruling, and any remedy is years away. Plan around the documents as written.

How does the forfeiture compare against a recruiting package?

Which brings us to the practical question: what does the deferred comp balance mean when an advisor considers a move?

It means less than the firms hope and more than recruiters sometimes admit, and the only way to know which is to run the numbers.

Build the forfeiture curve first. Every award, its plan, its dollar value, its vesting date. The curve steps down at each vesting event, which is why timing a transition around your dates is worth real money, and why an advisor three months from a large tranche has a different decision than one who just vested.

Then benchmark the package against it. Transition deals in the current market run at historic levels, and they are sized with full knowledge of what advisors leave behind; making the advisor whole on forfeited deferred comp, explicitly or through headline size, is standard calibration in competitive recruiting. An advisor negotiating with a precise forfeiture number extracts better terms than one negotiating with a feeling.

And weigh the tail risks on both sides. Staying preserves the unvested balance but leaves you exposed to annual comp-plan changes and ever-lengthening deferral schedules, the same one-way ratchet that built the balance in the first place. Leaving crystallizes the forfeiture but converts your economics to structures you chose. Neither is free. The full analysis prices both, after tax, against your horizon.

The deferred comp balance is the firm's favorite number in the retention conversation precisely because it is vague, large-sounding, and rarely calculated. Turn it into a schedule and it becomes what it always was: one input, knowable to the dollar, in a decision that deserves all the inputs.

Winthrop & Co. builds forfeiture schedules and benchmarks transition economics for advisors and teams, confidentially and before any commitment. Nothing in this article is legal or tax advice. Start the conversation here.

Sources (4)

Frequently asked

Do I lose my deferred compensation if I resign?

At most major firms, unvested deferred compensation is forfeited when an advisor resigns, particularly when leaving for a competitor. Vested balances are generally paid out under the plan's terms, though timing and conditions vary. The unvested balance is the number that matters in transition planning, and because plans typically vest each award over multiple years on a rolling schedule, an active advisor always carries some unvested balance. There is no date on which leaving costs nothing; there are only dates on which it costs less.

How do wirehouse deferred compensation plans actually work?

A percentage of each year's production is withheld and credited as deferred awards, typically a mix of firm stock units and cash-based plans, which vest years later. In the plan at issue in the Morgan Stanley litigation, for example, awards were split roughly 75 percent into a plan vesting in six years and 25 percent into one vesting in four. Deferral percentages generally rise with production, meaning the largest producers carry the largest unvested balances. Each new year's award restarts a fresh vesting clock, which is how the handcuffs stay on indefinitely.

Is forfeiting deferred compensation even legal?

That is the live question in front of the courts. In early 2020, Wells Fargo paid $79 million to settle class claims that its plan's forfeiture provision violated ERISA's vesting rules, without changing the plan's terms. A pending putative class action, Shafer v. Morgan Stanley, argues that Morgan Stanley's deferred compensation program is an ERISA pension plan whose forfeiture-on-resignation provisions are unlawful; the named plaintiff says he forfeited more than $500,000 after nine years of awards. Morgan Stanley disputes the claims and has fought to move the case into arbitration. No court has yet decided the core ERISA question, and until one does, advisors should plan around the forfeitures as written.

Will a new firm reimburse my forfeited deferred comp?

Frequently, in substance if not in name. Transition packages are sized against an advisor's full economic picture, and unvested deferred comp is a standard input: recruiters and firms know the forfeiture is the biggest friction in any move, and headline deals at competitive firms are calibrated to make advisors whole or better. Some structures address it explicitly with additional upfront consideration; others simply price the total package high enough to absorb it. The key is to negotiate from a precise forfeiture number rather than a guess.

How do I calculate what I would forfeit by leaving?

Pull every award statement and build a tranche-by-tranche schedule: award year, plan type, dollar amount, vesting date, and vested versus unvested status. The output is a forfeiture curve showing exactly what resigning costs on any given date, and how the number steps down at each vesting event. Most advisors who do this for the first time find surprises in both directions: balances they forgot existed, and vesting dates close enough to be worth waiting for. This schedule, alongside your other agreements, is the factual foundation for any transition decision.

Does deferred compensation mean I should stay?

It means you should do the math. Deferred comp is real money, but it is one input in a larger equation that includes the recruiting package available to you, your payout trajectory under a comp plan the firm can change annually, your practice's enterprise value elsewhere, and your time horizon. For some advisors the forfeiture genuinely tips the analysis toward staying. For many others, the unvested balance turns out to be smaller than the package built to offset it. Deciding either way without the numbers is the only clear mistake.

Filed

April 19, 2022