Matasar: Top Ten Mistakes Financial Advisors Make During Practice Transitions

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In the past several years, hundreds of financial advisors and teams have engaged me to provide them legal advice about the issues involved in moving their practice to a new broker/dealer firm.  During that time I’ve seen advisors who have methodically thought through every aspect of their move.  But, I have also had to help advisors who have made their transition needlessly more complicated and dangerous as a result of bad decisions they have made along the way.  In the hope that your next move goes more smoothly, here is my top ten list of mistakes advisors made during practice transitions

  1.  Not planning sufficiently ahead

More often than I would like, I speak to an advisor coming to me for help who tells me that they are planning to resign from their current firm shortly.  As in, next week.  Or this week.  Or, as just happened to me again recently, tomorrow.  These are not situations where the advisor is being forced out of the firm for business reasons or being “permitted to resign” under a cloud of suspicion.  Rather, they are simply the result of the advisors failing to plan ahead, or failing to appreciate how much advance work needs to be done in order to accomplish a smooth transition.  I typically tell advisors that they should start preparing for their transitions about three months before their anticipated move date.  Use that time to have as many meetings with your clients as you can.  Tell them how much you value them.  Answer any questions they might have about the assets you are managing.  And make sure they have your cell phone number.  Simple steps like these go a long way towards increasing the percentage of your book you’ll retain after your move.  While I do all that I can to give every advisor on the move the best advice I can, when a new client comes to me on the eve of their departure, it limits both the legal and business strategies I can recommend to them.

  1.  Not assembling a team of professional advisors

This second point is a corollary of the first.  Making a successful move is not just about keeping your book, it’s about accomplishing a successful transfer of your business.  The best moves I have seen are ones where the advisor or team assemble a small group of other professionals to get advice on their specific areas of expertise.  Here, I’m not just talking about hiring a lawyer.  If you are going to be opening your own office, retain a skilled commercial real estate agent who can give you advice about available office space and rental rates in your specific area.  If you do not have a specific opportunity that you are transitioning to take, retain an experienced brokerage industry recruiter (headhunter) who will work with you to understand your business model, your client mix, and what concerns are making you want to move so that they can match you up with the opportunities that best fit what you want.  If you are interested in obtaining a loan to finance your office build-out, or to cover your team’s salary over the first few months at your new firm, there are resources in the marketplace for that.  The point here is: you don’t have to do this all on your own.  Assembling a team of other professionals who can help you with specific aspects of your move can make all the difference.

  1.  Not cutting financial ties with the firm before giving notice

Several years ago I represented a team of advisors transitioning from one of the big wirehouses to a large independent broker dealer.  Several of the partners had the bulk of their liquid cash in money market accounts held at their current firm.  They paid their mortgages from these accounts, their wives used ATMs to access funds to go grocery shopping, and their car payments were automatically debited.  When they resigned from the wirehouse, what do you think happened next?  That’s right, their old firm froze their accounts, supposedly because there questions about some trades that had not yet fully settled.  It immediately put my clients in a compromised position.  They felt they could not be as aggressive as they wanted to be in going after their clients until the freeze was lifted on their accounts, and they made a stressful situation even more so.  That’s not to say that if you are considering changing firms that you want to suddenly drain your financial accounts held at your current firm.  But you do need to ensure that you have sufficient liquid assets held away from the firm to meet at least a month’s worth of core household expenses while the dust clears after your transition.

  1.  Loose lips sink ships

This one seems obvious, right?  And yet, you’d be amazed at the number of advisors I’ve worked with after being terminated because their firm “somehow” found out that they were leaving.  When you are planning a transition, don’t tell your assistant.  Don’t tell your golf partner.  Don’t tell your Aunt Ethel.  The more people who know beyond the core group of professional advisors you’ve assembled (see #9 above), the greater the chance of discovery.  And, the greater the chance that someone you thought you could trust will sell you down the river just to advance their own career prospects.  You don’t go around talking about your clients’ portfolios with others, so why would you share something as sensitive as the fact that you’re changing firms?

  1.  Thinking nobody in Compliance will notice all that data you downloaded or printed

Again, an obvious piece of advice but one you’d be surprised how often gets disregarded.  Downloading large numbers of files to a jump drive will get noticed—if not before you leave, certainly afterwards.  So will a big spike in your copier usage.  So, unless you’re copying family photos, favorite recipes, or your tax returns from your computer system, be prepared to explain yourself after you quit.

  1.  Not figuring out if you are protected by the Protocol for Broker Recruiting

This is an important one.  Do you know whether your current broker/dealer is a Protocol member?  If it is, has the firm asserted any carve-outs or exceptions to its participation?  Do you know which of the firms you’re considering joining belong to the Protocol?  Do you really understand how the Protocol works and what protections it does—and does not—give you when you change firms?  If the answer to any of these questions is no, then educate yourself.  There are many nuances to how the Protocol will apply in your particular situation, and it is crucial that you have a clear understanding before you march in and resign.

  1.  Burning bridges (more than necessary)

In my experience, two factors more than any others affect how your firm will react when you give notice:  how big your book is, and how you handle yourself in tendering your resignation.   Unfortunately, I have worked with more than a few advisors who brought problems upon themselves needlessly by giving their branch or regional manager a piece of their mind when they quit.  Although we have all that urge at some point in our professional lives, you need to resist that urge.  It may feel good in the moment, but it could also motivate the person you’ve offended on your way out the door to sick the firm’s legal department on you and make your life more difficult.

  1.  Not educating themselves about the restrictive covenants in their contracts

This is another really important item.  I have a library of sample registered representative agreements from well over 50 different firms and while the exact language, most have one thing in common–restrictive covenants.  Typically, there are two kinds of handcuffs in these agreements that apply after advisors resign: restrictions on the use of the firm’s “confidential information” and restrictions on “soliciting” your current clients to move their accounts to wherever you are going.  On the surface, these contract provisions can be very intimidating, and make it seem like your only option is to walk away and hope that your clients somehow find you and decide on their own to come with you.  Don’t fooled.  In nearly every contract I’ve reviewed there is enough room to enable you to take at least some steps to help transition your practice and without violating your contract and putting yourself at risk of being sued.  The trick is to know where those gaps in the contract are, and using them properly.

  1.  Being intimidated by cease and desist letters from your old firm

Broker/dealers hate it when advisors leave and clients start following them to a new firm.  Sometimes, the firm will send a “Cease and Desist” letter to the advisor to try and intimidate them and throw them off their game as they work to move their practice.  One large wirehouse even has a law firm on retainer that sends out the same threat letter nearly every time an advisor quits.  While you should always take letters from your old firm seriously and respond in a timely manner, do not lose sleep.  If you have followed each of the steps outlined above, you can confident that you are operating in a way that prevents your old firm from having an excuse to sue you.

  1.  Not hiring experienced broker/dealer industry legal counsel

No, this is not a shameless pitch for you to hire me—although I do handle broker transitions in all states except California, Louisiana and Florida because the laws are so different there.  My point here is, don’t just go to some local contract or trial lawyer, or the attorney you used to set up your will or help you buy your house.  It is important that you work with an attorney with deep securities industry background and experience.  Any number of special industry rules and regulations apply in practice transition scenarios, and the last thing you want to do is work with a lawyer who give you a blank stare when you mention your Form U5.


Scott Matasar, Esq. is a founding Member at Matasar Jacobs LLC in Cleveland, Ohio.  His legal practice is focused on representing firms and individuals in the securities brokerage industry.  Among other things, he regularly defends clients in FINRA arbitration cases, represents advisors under investigation by state and federal regulators, and counsels both firms and advisors on a wide range of regulatory and operational issues, including transition matters.  He can be reached at [email protected], or at 216.453.8181.


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