Look Before You Leap: Common Mistakes When Moving Firms
Changing firms can often feel like walking through a minefield of potential legal risks and other problems that could jeopardize a hard-earned book of business, lawyers and recruiters say.
Diamond recalls one particularly painful case with a team of advisors to ultra-wealthy clients who moved three years ago and chose the firm that gave them “the biggest recruitment deal possible.” When they arrived at the firm, they realized it didn’t have some of the alternative investments or basic lending tools they need for their rich clients.
“Because they were blinded by the money, they didn’t ask enough questions,” Diamond said, declining to identify the team or firms involved.
Because the recruiting deals are structured in the form of “forgivable loans” that amortize over a period of around a decade as long as the advisors stay in their seats, the brokers were stuck.
“They owe so much money that they are still there, three years later,” Diamond said.
Advisors can also trip up over logistical hurdles that give their move away to their current firm or draw unwanted attention, according to Scott Matasar, a partner at Matasar Jacobs, a Cleveland-based law firm.
“When you are planning a transition, don’t tell your assistant,” he advises in a listing of the top mistakes advisors make. “Don’t tell your golf partner. Don’t tell your Aunt Ethel.”
In one recent case in Ohio, a UBS team was reportedly put on leave after the firm became aware of their plan to move to Morgan Stanley. A similar scenario played out for a team that left Morgan Stanley to start a registered investment advisory firm in Long Island, New York, but were hit with a request for a temporary restraining order based in part on statements from a support staffer on the team who attested the team took client information.
Other mistakes include printing or copying an excessive amount of client documents in the weeks leading up to the departure, creating personal conflicts with managers on the way out, or even the most basic task of failing to read contracts, according to Matasar.
“Downloading large numbers of files to a jump drive will get noticed—if not before you leave, certainly afterwards,” Matasar wrote. “So will a big spike in your copier usage.”
In an interview, Matasar said that advisors also need to double check their employment agreements to see what is allowed in terms of client contact. Most firms and courts generally allow advisors to send a “tombstone letter” informing clients of their move without being considered to be in violation of their non-solicitation agreements, but each case is unique.
Matasar also suggests advisors be clear when moving among firms that are members of the Protocol for Broker Recruiting about what information they are allowed to take with them to their new firm. The agreement only allows brokers to take client name, address, phone number, email address, and account title of their former clients, and some team or retirement agreements can supercede.
“I’m always surprised by the number of brokers who have moved from one Protocol firm to another and only have a vague understanding of it,” says Matasar.
Don’t take any information is the key, however, if your move is not covered by the Protocol, lawyers said. Firm contracts are very onerous and in some cases even consider memorizing account information and using it at your new firm to be theft of trade secrets, according to Arthur Koski, a lawyer in Boca Raton, Florida.
“The big brokerage firms have spent a lot of time putting these contracts together so you have to be aware of the potential downsides,” he said.