What follows are comments from Charlie Risch, an attorney with Lawrence Kamin Saunders & Uhlenhop. Charlie has worked with many advisors who left captive broker/dealer relationships for the independent model.
First, Find Your Legal Partner
“If you’re seriously considering a move, your first step is finding a legal partner to help you avoid any critical mistakes.
“Advisors want to know first, can they take their clients with them. Generally, you can hold onto your clients if the firm you are leaving is a FINRA member. FINRA as a rule prohibits members from seeking court orders excluding you from accepting business from your clients. There is a difference, though, in accepting business and soliciting the clients to transfer their accounts. Soliciting is generally where the firm you are leaving can potentially have some remedies against you or restrictions on your ability to communicate with clients in the transition process, but this all depends. Many broker/dealers are members of a broker protocol, which is an agreement among firms that says as long as advisors do certain things – restrict what they take with them when they leave to certain information such as name, address, phone number – that firm will not sue the advisor under any solicitation provisions they may have in their contract. In other words, you would be free to solicit your clients to follow you when you go.
“If your firm is not a member of the broker protocol, for example if you are with a broker/dealer affiliated with the banks, there may be a non-solicitation agreement for advisors that work with bank clients. Non-solicited agreements are the most common kind of restricted contract, and they prevent you from soliciting clients to leave one firm and join you at your new firm for some set period of time. In most jurisdictions, most non-solicitation agreements are enforceable; the firm could try to get an order against you preventing you from reaching out to your clients.
“In John Lindsey’s case, he did a general mailing to a mailing list that he purchased. If the clients call you, as they did with John, as a result of that general mailing, you are free to accept that business and that is not a violation of the non-solicitation.
“An actual non-compete, which is very rare in the industry, could restrict you from accepting business, but a broker/dealer can’t have a non-compete with you under the FINRA rule. If you are leaving a registered investment advisor that is not a FINRA member, there may be a non-compete or some provision contract that could restrict what you can do with clients. Even in the broker protocol circumstances, there are certain limitations. For example, if you are in a partnership group at your current firm, and you are the only member of the partnership leaving, you may be restricted on the clients you take based on the partnership agreement as opposed to your agreement with the broker/dealer.
“Talking to a lawyer first and then planning how you leave is really crucial. You need to understand the rules you will be operating under. If the firm you are considering leaving is a broker protocol firm, the transition can be much less complicated. If it’s not a broker protocol member, what kinds of restrictions are under your contract, if any?
“The confidentiality provisions in your agreement with the broker/dealer may restrict you from taking confidential information. What constitutes confidential information is often under some dispute. For example, generally clients’ names are usually information you can get out with. But taking other documents – taking training materials or whole clients files – can cause you problems if you have an agreement not to solicit, even under the broker protocol. If you take material other than names, addresses, phone numbers, then sometimes the brokers/dealers will have remedies against you to stop you from soliciting. But in general, can you transfer clients? Yes. Can you accept business from clients? Yes, in almost all circumstances you can.
“The real restrictions come in the ability to reach out to clients, and there are ways to work around even non-solicitation provisions to get information out there so your clients reach out and follow you. The critical thing and important thing there to consult with a lawyer in advance, find out what rules you are working under so you can make the appropriate plan for how to make sure your clients can learn about your move, follow you and continue to get service with you.
“Get your team in place before you move. If the firm you are leaving decides to file an arbitration or a court case, you don’t want to be scrambling for the first time in trying to find someone to handle it. Often the first step they take is to send you a letter. How you respond to that letter can be very important in what will happen next from broker-dealer’s perspective. So it’s part of your planning to establish a relationship with a lawyer you know you can call to handle that for you, so you are not distracted by the legal things from getting your business up and running as an independent. That you can hand off to the lawyer who already has the background and who you already have a relationship with in which you’ve built a rapport and trust.
“The most common mistake I see is advisors calling a lawyer too late in the game, after they’ve already committed to a certain plan. The other common mistake is assuming that because another advisor left and the broker/dealer didn’t come after him, that they won’t come after you either. Firms will develop practices, and you can learn something from other people’s experiences, it’s not going to be universal. So you are always best off just planning. Find out what your contract does require. If you know the restrictions of the contract, you can plan how to deal with them. The real mistakes are coming from not getting enough information so they can make appropriate plans. Usually if you get the information and make appropriate plans, you can really minimize problems from a legal perspective.”
Part 4 of the transcript is coming soon. Meanwhile, please look around this site and Contact Me if you have any questions or would like to discuss a possible transition away from your current firm.
Wishing you a very Happy New Year,
John Lindsey, CFP®