An Employment Scam in the Financial Services Industry
A Warning for Recent College Grads and Others New to the Financial Services Industry

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Failure: It's All Legal!

It is a copout to put the full blame for failure on this 80-95% who throw in the towel at scammer firms given the odds against them, yet that is exactly what happens. Furthermore, it serves a purpose.

At the scammer firm, success is always just "around the corner." Scammers convince the rep that he's one of the "elite" who can make it and pound into him that it's his fault when he can't. Lures of cash bonuses and trips are dangled, constant "you-can-do-it" rah-rah meetings are mandatory, and reps are told that quitters just "didn't have what it takes" (unlike you who are sticking it out!) or "violated major securities laws and were fired" (but we know you wouldn't do such a thing!). A real cult mentality of false hope develops among reps who buy into this reasoning. This is an actual quote* from a rep:

"[XXXX] is a great company and yes just like anything else it's hard to make $100,000 a year. But if your [sic] willing to put in the work it's just almost guaranteed that you will make it... if you are willing to do what I've done you will have the same results, if not than [sic] quit like everyone else quits everything they do and be bitter. But don't bad mouth a great company because you don't have what it takes to win."

I have little doubt that that rep was gone within 2 years and never pulled $100K. This quote* is my favorite and pretty much sums it up:

"Can you tell a 21 year old [...] who makes $50,000 a year with [XXXX] a loser? I know I am but what are you?"

Yeah, right!

It's all designed to instill in the quitter an unreasonable sense of failure. Why? If the quitter feels responsible for his failure, he won't place the blame where it belongs and sue the firm. After all, he's been purposely deceived! Guilt and shame are instrumental in avoiding lawsuits at this point. The statute of limitations may have run out by the time he's over his shame. A loss of $5000** or less that could otherwise be recouped in small claims court may be rationalized away as a lesson learned, an investment in learning to run a "business," or an investment in the "education" he received.

Sure, but a loss of over $5000** is a greater impetus to sue, right? Not with these obstacles:

  • The rep likely signed a contract that included a clause that any conflicts must be solved in arbitration or mediation and not through a lawsuit. This can greatly impact the outcome and limit recovery. A rep may believe he's much more limited than he may be in reality (it's important to consult an attorney to dispel this belief). It's unwise to proceed without an attorney, and attorneys don't come cheap... and chances are the rep is now in no financial position to hire one!
  • The burden of proof lies with the rep, and he's often only got his word. The firm has been careful to make false promises verbally and will defend with written documents the recruit may have never even seen (official company literature on sales targets, licensing requirements, training program costs; the Independent Contractor agreement; the Non-Compete Agreement; etc.).
  • If the rep's loss exceeds $5000** and he's not bound to arbitration/mediation, he must sue in civil court, which requires the services of an attorney. When I last checked, it cost between $15-20,000 in my state just to hire an attorney to begin proceedings, and the rep's wallet is much lighter now, so that's likely out of the question.
  • Another alternative is finding other similarly wronged former reps who will agree to pool legal resources for a class-action lawsuit, but even that recourse is fraught with danger. If the former rep publicly solicits others to come forward with their own allegations against the firm, the firm can quickly turn implied allegations into a libel/slander lawsuit against the rep in some outrageous amount, leading the rep to believe he must slug it out in, you guessed it, civil court, with the aid of an expensive defense attorney. (See the "Anti-SLAPP law" section on the "Prosecution" page ahead for more on this.) The rep is crippled before he's even out of the gate! The firm, of course, isn't aiming to collect a dime; it's seeking to discourage any and all who might sue. Even though the rep is telling the truth, since he can't afford an attorney to defend himself, he is forced to accept the firm's terms to settle the case (usually out of court), which invariably involve a permanent injunction against EVER telling his story to ANYONE. Now not only is he unable to find others to pool resources for legal representation in the class action lawsuit, but others can't find him either.

The rep has indeed failed. No loss to the firm though! The recruit paid for his tenure there and likely left a commission trail to boot. They're already on to recruiting tomorrow's failures.

Here's a direct quote* from someone on a financial industry message board who gets it:

"... all operate on the same principle when recruiting new agents and licensed professionals on a commission-only basis: it's all a numbers game. That is, they know that the industry average is that 90% of new agents will be out of business by their fourth year. Only 10% survive to make a lifelong career with the big companies. Therefore, [XXXX], [XXXX], [XXXX], etc., constantly hire new sales personnel to replace the majority who don't make it. It can be extremely frustrating in the beginning, especially if you do not have a large circle of friends and family who will buy from you early in your career."

And another*:

"... Some further questions I asked were: what would be my commission schedule? Well, not ever really getting a straight answer, I was able to determine that my first six "training" sales, I received no commission, the next six I received 25% of the commission, and it worked it's way up to 75% of the commission after many more. That is why those on top in [XXXX] think its [sic] so great. They get you to make sales to your family and friends, which they make money on (and you don't), and so if you don't make another sale after your family and friends, they still made a boatload of money from you...

And another*:

"The truth is that you will not own your client base; you will not even own your own files! [...] If you own a business, you can sell what you want, locate it where you want, and sell it to someone else when you want to get out. Not here. If you leave, the local manager will hold your files and assign rookie agents to retain control of your clients."

Unfortunately, laws are still largely stuck in "buyer beware" mode. So how can this scam be stopped?

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* All quotes were found in public fora.
** or whatever your state's limit is