Breakaway Broker Blasts Schwab Over Nightmare Breakup

April 21, 2015 at 05:46 AM

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At 7 a.m. on the day after advisor Richard M. Rosso resigned from Charles Schwab & Co., Walter Bettinger, CEO and president, phoned to invite him to lunch. He wanted to know why one of the firm's most prominent financial consultants, employed by Schwab for 14 years, was leaving.

They made a date. Then Bettinger abruptly canceled: Instead of a meeting of minds in San Francisco, Rosso was subjected to a bruising two-year battle with Schwab in Texas State Court and Financial Industry Regulatory Authority arbitration.

Rosso, 50, had gone from golden guy, lauded and applauded by Schwab, to an alleged client poacher, a "mole" who violated his non-solicitation agreement and diverted employer clients to another firm. Schwab charged that the extroverted advisor had brainwashed folks into being exceptionally dependent so they'd follow him to Clarity Financial, a boutique RIA he joined after breaking away.

Indeed, the brokerage used Rosso's ace client relationship-building skills as a weapon against him, the FA told ThinkAdvisor in an exclusive interview.

Though Schwab failed to win the $6.3 million in damages it was seeking from Rosso and two colleagues, the arbitration panel this past January found Rosso liable for $60,000 plus interest; his attorneys' fees came to $203,000.

Worse than that financial hit, the grueling ordeal cost the beleaguered advisor his health: He suffered a breakdown, and stress largely contributed to the loss of a kidney. In addition, Rosso holds the strain created by the nightmare litigation responsible for the breakup of his marriage. He and his ex-wife are parents of a daughter.

For the better part of 14 years, Rosso was a high-profile financial consultant at Schwab, earning exemplary reviews and known by Charles Schwab himself and Bettinger for his loyalty, sales acumen and, especially, his top-notch client relationship skills. Schwab chief investment strategist Liz Ann Sonders sought his market opinions. He was an official Schwab source for reporters of The Wall Street Journal and The New York Times, among other publications, and appeared regularly on CNBC and Fox TV.

At his peak, Rosso was managing $300 million in fee-based client assets. Today, as an RIA at Clarity in Houston, his assets under management are down to $105 million. The independent firm's founder, Connie Mack, has stepped up to arrange for a line of credit for Rosso, still about $100,000 in debt.

Schwab is a vengeful, abusive company whose purported brand did not jibe with Rosso's actual job requirements, the advisor contends. His lawyer, Clinton Marrs, calls Schwab "a corporate bully" whose $6.3 million suit was excessive, to say the least. "It's like 'Alice in Wonderland's' mad queen: 'Off with their heads!' Cut them up in tiny little pieces!" he remarks, in an interview.

Ultimately, in addition to mandating Rosso to pay Schwab $60,000, the arbitration panel found his ex-Schwab colleague, Mark Blom, also now at Clarity, liable for $10,000 plus interest; Mack was not found liable.

For Schwab's part, Sarah Bulgatz, public relations director, comments: "This was a case involving breach of loyalty to Schwab for personal gain, something we take very seriously. We're pleased that the FINRA arbitration panel found two of the employees' behavior unacceptable; but we think the damages it ordered to pay should have been higher, and we believe the third employee should have been found liable as well."

Rosso's creamy Schwab scenario began to curdle when the firm diminished its focus on Private Client FCs' personal delivery of service and reduced their role to salespeople chasing challenging selling goals.

As a Private Client FC, Rosso resisted that change and wasted no time telling superiors that its new strategy was a blunder not in his clients' best interests.

A native New Yorker with a direct approach, Rosso had survived a tumultuous childhood in a rough part of Brooklyn. He was reared by his divorced mother, an alcoholic, drug addict and, he says, a prostitute. Her boyfriends had even attempted to kill him, he says. Three times he saved his mother from suicide. A sometime-distraction from the mayhem was young Rosso's fascination with the stock market. He particularly admired Charles Schwab & Co.

He began his career in 1989 at penny stock firm J.T. Moran in Garden City, New York, then became branch manager-vice president at Dreyfus Mutual Funds in Sarasota, Florida. By 1998, he had joined Schwab as an investment consultant in suburban Houston.

Rosso described his rise and fall at Schwab in a recent phone interview. The certified financial planner — who wrote the book, "Random Thoughts of a Money Muse" (CreateSpace 2012), while at Schwab — writes about finance in prominent publications and is a frequent guest commentator on Houston television.

ThinkAdvisor: How would you summarize your experience as a "breakaway broker"?

Richard M. Rosso: Schwab is a corporate terrorist. This was the most stressful, scariest thing that's ever happened to me in my entire life. Throwing the kitchen sink at me was to scare me and set me up as an example. They do that to anybody who leaves, I think. It doesn't matter what the facts are — they will create something.

Let's talk about the good old days at Schwab.

Initially the job was mostly order-taking. Eventually that changed, and I got promoted fairly quickly because I was recognized for my relationships with clients.

How did things progress?

Four years after I joined the firm, they started a new program, Schwab Private Client, a fee-based, nondiscretionary offer. The financial consultants were handpicked, and I was one of them. This was Schwab trying to cross the bridge from discount broker to full-service and giving advice. It was ongoing relationship-based, with a holistic approach. It was as close to being a fiduciary relationship you could have in a non-fiduciary world. You were the custodian of your clients' dreams — that was the brand.

How did the firm view your performance?

Schwab loved the relationships that I built. I became a thought leader at seminar workshops about how to build relationships and how to discuss things outside the portfolio.

To what extent did you like the Private Client program?

I thought it was paradise. I thought Schwab had figured it out and would take over the marketplace.

Did you grow more successful?

In 2003, I really started to get recognized and was writing for the Schwab Report that went out to reporters. I got exposure through interviews in The New York Times, USA Today and other outlets. I was on television. I did my own radio show for two years. I mentored [FCs] across the country. My career was very strong. Frankly, I thought I would retire from Schwab.

Did you have your own book of clients?

No, they were Schwab clients. They had a huge database, and you were told to go in and cultivate those clients for Schwab. I was the face of Schwab but also there to help monetize the clients.

Were you part of a team?

Yes, but not for every client. Typically Connie Mack, Mark Blom and I [teamed up] for economies of scale when we wanted to have uniformity across the advice. We didn't share the revenue. I was the big-picture guy. Mark was the portfolio consultant, located in Phoenix. Connie Mack had the same [job] as I but in another [geographic] area.

When did things start to go south?

Private Client was like a pretty statue that was getting chipped away every day. First Schwab spread the Private Client offer to everybody; therefore, I had to compete with everybody for those clients. I had been exclusively Private Client, and then I became a financial consultant handling clients outside the Private Client group. When did the situation worsen?

Things started to really accelerate downward during the financial crisis. We weren't getting guidance from the firm. When everything was starting to crumble, especially in fixed-income, it was almost as if these problems didn't exist [to Schwab]. The whole world was collapsing, but it was like we were in a trench with a gun but no bullets.

Walter Bettinger was named president-CEO of The Charles Schwab Corp. in October 2008. What effect did that have?

When he came in, the whole climate of the firm changed. But more than that, it was the financial and the interest rate climate that put Schwab under pressure to monetize business. I understood that. But I had a pretty good revenue-based practice that I had put blood into over the years.

How did you help clients deal with the meltdown?

Mark, Connie and I would meet at night to try to figure out what to do. We shared best practices, industry marketing knowledge, nothing proprietary to Schwab. Clients were calling us, and we weren't getting guidance from management. So we decided to call the clients proactively.

Was there another sign that Schwab was changing?

Our group had $30 million to $40 million in a Schwab proprietary product, Yield Plus, in 2007. The firm marketed it almost like a cash substitute, and the share price was supposed to stay relatively stable. It always had; but during the crisis, it really started to move, especially downward. The objective of Yield Plus was stability of principal. So obviously something had changed.

How did you react when it came to clients' investments in Yield Plus?

Our team sold it. None of the clients lost money. But through the years after we sold, there weren't many redemptions. I wondered how that could possibly be when the share price was collapsing. Schwab was saying, "Nothing's wrong; everything's fine." It turned out that many lawsuits were brought over Yield Plus. Schwab isn't unethical, but it holds itself out as being above — and it's not.

What was the firm's marketing strategy during the meltdown?

Its solution was to offer Private Client for free. From a marketing perspective, that was genius. From a practice management perspective, it was: How am I going to take on clients who aren't paying a fee, when I'm not getting guidance to help my existing clients?

As the crisis subsided, what happened?

That's when things really started to change: We were getting a lot more pressure to sell proprietary product. I couldn't understand why every client would need [managed portfolio solution] Windhaven, for instance. It seemed that every client was being sold that same product. Before the crisis, Schwab on the surface was what Schwab was underneath. But then it became: underneath it was pretty much Merrill Lynch.

How did all this affect your client relationships?

Because of regulatory pressure, Schwab was now starting to deeply divide the roles: They split Private Client and made [part of it] an RIA. I wasn't a fiduciary, but I always felt I had a fiduciary responsibility and got lauded for it. Now I was on the sales side under a Series 7. So I was getting cut out of the equation. If clients wanted information about a particular investment, I was no longer able to talk about it. It was more about selling product, especially Schwab proprietary product. Before, I could sell whatever I wanted.

How did that change sit with you?

I began to think maybe I was more custodian of [the firm's] shareholders' dreams than custodian of clients' dreams. My CFP didn't really mean anything anymore. It was just me selling product and moving on. Did you voice dissatisfaction?

I was very vocal. I tried to take a stand, and it made me a target. In meetings, I said, "Why don't you make the face-person part of the RIA?" But I think Schwab no longer wanted close relationships between branch representatives and clients because it felt that was a danger since some private clients had left when their representatives left. It seemed Schwab was trying to drive a wedge into the relationships to make sure that couldn't happen again.

How did the focus on sales affect your performance?

I was behind the 8-ball. I felt conflicted because I couldn't give clients the level of service as before because now I had these incredible sales goals. But I couldn't hit the sales goals. I had been very successful, and now I was no longer successful. There was no way I could meet with the clients and still meet those ambitious sales goals.

Did the firm call you on your failure to hit the goals?

My manager said, "You've got to pick it up!" There was a lot of pressure for me to produce. My issue became: How do I work with the clients I have when I've got this intense selling pressure?

How else did they press you?

At sales meetings, we'd get asked, "How many Windhaven accounts did you do? How many mortgages did you sell?" I was told I was "a dinosaur" — that "this is not how we do business anymore [i.e., with relationships]." I had been lauded for my client relationships. Now it was almost a hindrance to have them.

Did anything else hamper you?

Clients wanted validation of the new [portfolio] person [taking Blom's place after he resigned in March 2012] and phoned me about this continuously. So the transition process took three times longer than it probably should have, and the calls pulled me away from my sales goals.

Did you speak up and tell the firm about that?

I was very vocal about the way the transition to the new portfolio person was handled. And when they made [other] changes that I thought weren't beneficial to the clients, I told my branch manager I wasn't going to do those procedures — that it made absolutely no sense because the client experience would be damaged. That didn't go over very well.

It must have provoked them.

I was upset. I was like an angry child, hoping to get someone's attention to see what Schwab was doing by diluting the client relationships — and that's what I refused to do. I thought I was doing the right thing. But by then, it was almost like I didn't care anymore. I felt my career was pretty much over.

Did all this take a toll on your health?

I was getting sick from the stress. During my last four months at Schwab, I was having a total breakdown. I was on antidepressants. I was drinking heavily. I had a twitch in my eye and other stress conditions because I was torn between Schwab and the clients. I phoned some clients to tell them, "I don't know how long I'm going to be here. There have been some changes, and I no longer fit in. But I don't want you to call one day and suddenly find that I'm not here." I also sent an email of this nature to my regional manager. Did Schwab suspect that you were going to resign?

Both Connie and Mark had left. Connie resigned in 2009 to open a medical malpractice insurance business and then formed an RIA, Clarity. Mark left because he felt his role had been reduced to "a call center person." He joined Clarity in April 2012. So Schwab figured I was the next one to go. They'd had this experience many times, when groups left and took all their clients.

What did Schwab do when they thought you were leaving?

They were monitoring my instant messages [internal email] and phone calls. They knew that I was unhappy and thinking about leaving, and were paranoid that I was creating something behind the scenes. From that point on, I wasn't trusted.

For example?

Schwab asked me if I gave Connie the Clarity name. I said, "Yes – what's the big deal?" When he was forming his RIA, he asked me if he could call it Clarity because [when we worked together] I had used that word with clients to help them understand [investing], and he liked it. I said, "Sure." The closer I was getting pushed out of Schwab, the more I helped Connie with marketing ideas; but I was never committed to going to Clarity. And I didn't consider a little firm like Clarity competition for Schwab.

At this point, what was your main conflict?

Schwab was no longer the organization I went to work for. They wanted to take my service standard away from me, and I had a choice: I could dilute it, or I could leave. I decided to leave.

And on September 20, 2012, you did.

I drove in, typed my letter of resignation and gave it to the branch manager. He asked where I was going. I said I wasn't sure. And that was true.

How did the firm react to your resignation?

Early the next morning, Walter Bettinger called me from San Francisco. He said, "I don't understand why you left. You need to get on a plane and come see me." I was like, "Wow, I thought I was being kicked out of Schwab, and now I get a call from the CEO!" I told Connie and everybody that if I can make Walt Bettinger understand why I left and got offered a job, I'd rescind my resignation notice.

You were excited.

Yes. Bettinger's office made plane reservations for me and set up a lunch. I bought a new suit and tie. Then I got a call from the secretary canceling. I [subsequently] learned that they were now looking at a "collusion" theory. So instead of getting wined and dined, I was having the book thrown at me.

What do you think triggered Schwab's lawsuit?

Under Schwab's contract, when you give notice, you can't have client contact for 28 days. They sent my U5 [termination notice] a couple of days after I resigned indicating the day of termination as the day I resigned, not Day 28. Then I discovered that my health insurance had been canceled; I thought I would be covered for thirty days from Sept. 20. And when I deposited my last paycheck, Schwab stopped payment on it. All that indicated to me that they let me go on Day 1, and therefore I was no longer barred from having client contact. A handful of clients contacted me during that 28-day period. What was your next step?

I wasn't getting paid, so I started to accelerate looking for a place to work. Also, it was getting closer to when my book was coming out, and I needed to find a home in case clients looked for me.

I was considering three companies. The first choice was StreetTalk Advisors. But Schwab is their custodian for institutional assets; and Schwab said that if they hired me, they'd be kicked off the platform. I was also talking with Stern Brothers but decided that wasn't a good fit, and the negotiation ended. I went to Clarity as a path of least resistance and started there on Nov. 1, 2012.

When did Schwab take you to court?

In March of 2013 I got a cease-and-desist injunction about contacting clients proactively, that I had improper contact during those 28 days. I went into shock and thought my whole career was over.

What did they allege specifically?

They said I was "a mole" for Clarity. They said it was a conspiracy — that Connie, Mark and I had an insidious plan of shifting clients to Clarity.

How did you react to the allegations?

I shut down. I stayed in bed for three weeks. I lost 15 pounds. I didn't take my blood pressure medication. I was going through PTSD — Post-Traumatic Schwab Disorder. My kidney shut down, and I ended up losing it. I went into hibernation for a couple of months. My career was over, I thought. It was like a death. Let's just say I had been a little too dedicated to Schwab. So when it all fell apart, I sort of did, too.

Were there more repercussions?

The health issues coupled with the financial issues ended my marriage, and I lost my family. My wife and I separated and then divorced.

What happened with the court case?

We were on the verge of filing a motion for summary judgment, which says to the judge that you needn't have a trial to decide who's telling the truth; the facts aren't disputed — when, in January of 2014, Schwab suddenly dropped the case. They [obviously] didn't want to face the judge. That left me with the caprice of mandatory arbitration.

Why was the parallel arbitration claim — filed in March 2013 and amended that July to include Connie Mack — against Mark and Connie too?

Because Schwab found in the discovery process [for the lawsuit but not permitted in arbitration] that we were meeting during the financial crisis. They found that very suspicious — that it meant we were trying to compete against them.

Schwab's claim alleged "breach of contract; misappropriation of trade secrets; breach of duty of loyalty; tortious interference with contracts and business relations; unfair competition; civil conspiracy; and breach of fiduciary duty." What was their thrust during the arbitration hearing in January of this year?

That I didn't want to follow the rules, that when Schwab, because of regulatory obligations, had to divide the registered investment advisory from the sales force, I never accepted that. I accepted that just fine. What I didn't accept was that I was no longer supposed to provide the client relationships. I didn't fit into their new transactional culture.

What else did they say about you during the eight-day hearing?

In the elaborate story they created, I got painted as this rogue guy who didn't listen to policy and induced clients by disparaging Schwab. They again called me "a mole" for Clarity, that the only reason I was working at Schwab was to induce clients by making them dependent on me so I could divert assets to Clarity. They said that Schwab couldn't compete with the service I was providing. Big company couldn't compete with little ol' me! What helped support your case?

I never solicited clients. When I left, clients found me because I have a big media presence in Houston and Dallas. People called the local Fox TV station. I write nationally for USA Today and MarketWatch. They contacted me through Facebook. I brought in 13 witnesses, clients who found me [as much as] a year-and-a-half after I left Schwab. One guy located me through Google, but Schwab tried to interpret that as my doing something to him before I left Schwab — like I had some sort of mind-meld process. It was surreal!

What do you think the firm basically wanted to accomplish by taking you to arbitration?

Schwab wanted to hang me out to the rest of the group and say, "This is what happens when you pick up and leave." I was grateful that the FINRA panel saw through the smoke and mirrors and recognized that I was speaking truthfully.

But you still had to pay Schwab.

They dinged me $60,000. It was a little slap on the wrist. Ultimately we got more money back [in AUM] than we paid — not [including] my legal fees. Had Schwab got the $6.3 million they wanted, it would have destroyed us.

So do you feel like a winner?

I feel vindicated, but in another way I still have damage — mentally, physically and financially, which will take a long time to work through.

But wasn't this a victory?

It's a moral victory in a way, but Schwab still wins because they put us through a wringer and scared everybody else on their sales force to ever try to leave. It's very dangerous to break away from Schwab. Even if you try to leave in the right way, it doesn't matter because they can still come after you. Schwab is going to watch you. Schwab is litigious, and [lawsuits and arbitrations are] very expensive.

Do you regret leaving Schwab?

No. I would do it again because it's so much better on this side and because throughout the whole process, I felt this one thing: I was great to clients. How did that hurt Schwab? I thought I was doing what I was supposed to do — provide incredible service. I thought I had a fiduciary role even though I wasn't a fiduciary. Schwab used my deep relationship skills, which helped Schwab tremendously when I was there but which worked against me when I left.

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