Originally published in the "Elite Advisor Forum", 01/09/12.
In a prior article, I discussed the new recruiting boom for financial advisers and how mistakes made in the beginning of the process can come back to haunt you, lead to potential litigation or even make it very difficult for you to leave your firm.
Besides making sure you don't get caught, you need to avoid violations of privacy regulations, confidentiality and trade secret agreements, restrictions on solicitation, and the "employee's duty of loyalty" when you begin the interview process with another firm. I also discussed the need for you to analyze documents you may have signed at both your old and new firm, the terms of your deferred compensation plans and whether you will have problems with automatic transfer of your State registrations. I also discussed consideration of your various alternatives prior to beginning the process. Here we will cover the process for successful adviser transitions that I have developed over the past several decades of moving hundreds of top-producing advisers.
There is no right place to go for everyone, nor is a move necessarily the right thing, even for some huge recruiting package. The critical issue is, to the extent reasonably possible, to be fully informed, to have everything important properly documented, to avoid unpleasant surprises when you arrive at a new firm and to have the best contract you possibly can from your new firm.
The Process
After you collect your documents and review the things you must avoid during the process, I break down the critical areas as follows: (1) determining Recruiting Protocol status; (2) reviewing portability of assets; (3) issues regarding economic terms; (4) issues regarding other contract terms; (5) due diligence and documentation; (6) logistics of the actual move; and (7) post-move issues, including benefit conversions, tax planning and disputes with your prior employer.
Restrictive Covenants and the Recruiting Protocol
Anything can go wrong at any firm. There is no way to guarantee with certainty that you will not find it intolerable to stay. Your basic last-resort protection is your ability to leave and take your clients. There are contract provisions and State laws that can restrict your ability to do that. If you go anywhere, it is important to know the extent to which you will have significant impediments to leaving if the new job does not work out. And, it is critical to know what your current employer can do to make your move more difficult, as mentioned in the last installment in this series.
The Recruiting Protocol is an agreement signed by hundreds of broker-dealers and investment advisers. Under the Protocol, if you move between firms that are both signatories, you may take your customers' basic contact information with you and non-solicit restrictions will not apply to those clients. The Protocol has a number of conditions and limitations that must be followed. Find out if your firm is a signatory to the Protocol and if the firms you are talking to are signatories. It may not be a determinative issue by itself, but it is important to consider.
It is critical to remember that any firm can resign from the Protocol without notice. You should not ignore dealing with restrictive covenants and other such items that could restrict a future move just because a firm is a signatory to the Protocol. You need to see everything you will sign --and sign for--at a new firm. Restrictive covenants can be buried anywhere, or they can be presented to you in a document only after you arrive at your new job—terms you knew nothing about before joining the new firm.
It is important to have some basic understanding of the laws of your State. In some States, restrictions on solicitation are strictly enforced, while in others, restrictions may be relatively ineffective. In some States the restriction known as "garden leave" is enforceable; in others it is not.
While disputes will generally go to FINRA arbitration (if you are employed by a broker-dealer) after an initial attempt to obtain a restraining order in court, the initial issues in a court will generally involve the law of the State where you are employed, with some exceptions. The importance of the restrictions you are subject to now, and will be subject to at a new firm, may be somewhat more or less critical depending on the State where you are employed.
There are arguments as to whether garden leave is pre-empted by the Protocol when the firm you leave and the firm you go to are signatories. When fully enforceable, garden leave may be the most restrictive covenant. Under garden leave, you must give notice to your current firm before quitting—often 60 to 90 days prior—during which time you must remain an employee of your current firm on a salary that is contingent on your following the orders of your current employer. Such orders may include refraining from communicating with clients while your old firm contacts those clients and solicits them stay at the firm with another adviser.
Critical Contract Issues
Too many advisers focus just on the economics of their deal. The real issues are in the details.
Watch out for undefined terms. For instance, you may have incentive compensation based on "assets" or "revenues." Do you know for sure how your new firm does these compensation calculations? Did you give them the numbers they use to set your hurdles? Do you have it in writing? Do you clearly know when it is measured? Is it granted when you achieve the goal (high-water mark) or measured on some specific date? I know more than a few advisers who signed agreements, and years later when it impacted them, realized they did not know or understand the answers when it mattered most.
What if you are terminated without cause (for example, your production is low and your deal is not attractive to the firm)? Do you owe everything back? If you have protection for termination without cause, how is "cause" defined? Is it meaningful? What if you leave because the firm breaches critical promises made to you (which you'd better have in writing)? Do you owe the money back? What if the firm cuts your payout in half or switches to a completely different compensation plan as soon as you arrive?
It can be impractical to try to move your practice twice in a short period. It is critical to understand your contract and resolve any ambiguities. And it is critical to know what concessions any prospective employer will, or will not, make if they are important to you.
Disputes with Your Prior Firm
Disputes with your prior employer can include such items as these: (i) allegations that you breached your contract restrictions, such as confidentiality, non-solicitation or notice to quit; (ii) allegations of breach of the Protocol; (iii) disputes over final pay or expense reimbursement; (iv) disputes over repayment of loans; (v) defamation by your prior employer, including in communications to your clients or in regulatory filings; and (vi) issues over Automated Customer Account Transfer Service (ACATS) and changes of broker of record or transfer or other client assets. You need to be as prepared as possible to deal with any of these disputes. And you need to know who will pay for the legal fees or any damages in each case.
More to Come
Future installments of this series will address the rest of the steps in the process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
