Ask the Ethicist

Dan Candura answers readers’ questions on the ethical dilemmas financial advisers face.

Ethical considerations advisers need to think about before switching firms

Honor both your employment letter and the spirit of your existing agreements

Sep 7, 2016 @ 1:48 pm

By Dan Candura

This month's question comes from an adviser who wants to know the ethical considerations of moving to an independent RIA from a large bank.

Q: I am thinking of leaving my current position with a large bank to establish a position as an independent RIA. I have been with the bank for several years and have many regular clients in the two branches that I serve. I want to expand the types of offerings that I can provide to clients beyond just those available at the bank. This has been frustrating for me as well as my clients. Before I make this leap, I am concerned about the ethical considerations involved in working with existing clients once I open a new firm.

A: You are right to be concerned about the ethical implications but I urge you to consider the legal consequences as well. Not everything that is ethical is legal and not everything that is legal is ethical.

The first thing to review is your employment agreement with the bank. It is likely that there is either a non-compete clause or a non-solicitation clause that describes whether and when you can approach existing clients. The most onerous of these may preclude any and all contact for a period of a year or more. There may also be language that specifically reserves ownership of all client relationships to your employer. Although you think of them as “my clients,” in a legal sense they may actually be “bank clients.” Taking action that would alienate the clients from the bank could be viewed as a form of theft. This is especially true since the profitability of virtually all financial products depends on the persistency of the client relationship.

Firms often lose money on new sales and do not break even until several years down the road. But most adviser compensation is front-loaded with only a small portion consisting of trails over time. This incentivizes advisers to solicit new clients but creates a conflict between adviser and employer. Firms deal with the conflict by enacting restrictive language in their employment agreements to preserve the client relationships if an adviser leaves for any reason. Enforcement of these agreements varies depending on the firm and sometimes by the adviser. These legal battles can be costly to both parties and are a serious distraction for an adviser establishing a new firm.

From an ethical view, the picture is clearer. You signed an agreement that describes what you cannot do after you leave the firm. Pleading ignorance because you did not read the agreement carefully before you signed it will not protect you in court and does not provide an ethical rationale to ignore the provisions either. You must comply with the terms as difficult as that may be. Taking clients with you to your new firm might prove to be illegal if the firm fights it, but would surely be unethical whether they take legal action or not. Clients see advisers they are trustworthy and honor their commitments. Soliciting clients to leave a firm that you supported when you first brought them on-board sends a disturbing message that maybe you are placing your interests ahead of your former employer and that you might be placing your interests ahead of theirs, too.

Bottom line: Honor both the letter and the spirit of your existing agreements. Leave if you must but leave your clients behind. In this age of social media, it won't be hard for them to find you if they are dissatisfied with the new adviser assigned by the bank. If they contact you before the expiration of any restrictions, ask them to wait until after the restrictions end. They will be impressed with your integrity and recognize that you will not place your interests ahead of theirs.

Dan Candura is founder of the education and consulting firm Candura Group. Write to him to submit a question. All submissions will be treated confidentially.


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