Ask the Ethicist

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

Ask the Ethicist: What should an adviser do if their former firm violates a non-compete agreement?

Litigation over these agreements often favors the firm, but there are ways for advisers to protect their businesses

Apr 28, 2017 @ 4:24 pm

By Dan Candura

Q: I'd like your opinion on something that happened to a friend of mine who recently left his position as a veteran adviser with a wirehouse to go independent. Before he left he mailed a "tombstone" letter to his clients so they were aware that he was leaving the firm. Under the terms of his non-compete agreement, he is not allowed to reach out to his clients but is able to respond to client inquiries that are "unsolicited." This is where I have some ethical concerns. My friend fully intends to honor the non-compete. His former firm has a reputation for aggressively enforcing the provisions through legal channels, and my friend does not want to get involved in a nasty legal battle. But there are some at his old firm who may be taking advantage of his passive approach. His former clients are now reassigned to advisers at the wirehouse. Everyone knows my friend has a home in Florida and usually spends the winter there servicing clients remotely. When new advisers reach out to these clients, they feed them a line that my friend retired to Florida and that there is no point trying to get in touch with him. I am not sure whether this is being encouraged by the firm, but I know it is happening.

(More: The case for more prominently disclosing compensation and conflicts of interest)

A: Your friend is doing the right thing by complying with the provisions of the non-compete agreement. Litigation over these agreements often favors the firm, since they wrote the agreement with great care while advisers reviewed it less diligently. The firm also has access to attorneys who understand the agreement from past cases, so they can litigate the issue at less cost than the former adviser. Typically, firms start by asking the former adviser to stop whatever actions they deem to be in violation. If this fails, they go to court to seek an injunction to halt the activity immediately. Of course, this requires sufficient evidence to convince the court that probable cause exists of potential violations to the agreement.

In theory, the same approach is available to your friend. He can contact local management and tell them some of his ex-colleagues are providing clients with misleading information. This may be enough to resolve the problem, especially if it's a case of some "overly enthusiastic" advisers acting on their own. If it is more than that — if it is a concerted effort by the firm to retain client assets by any means — then your friend can also go to court to seek an injunction requiring the firm to tell clients the truth. But obtaining the Temporary Restraining Order (TRO) will also require evidence beyond vague reports about what someone said. It will require assembling written statements from clients attesting to the fact that they were lied to about your friend's retirement — not just one client but several, so as to prove that the firm was acting in a deliberate fashion to harm your friend. Obtaining these affidavits would be difficult to accomplish without violating the non-compete agreement. That is a Catch-22 if there ever was one.

Your friend could spend a lot of money on attorney fees trying to build a case against the firm that would be exceedingly difficult to prove. Even if successful, the court may just tell them to stop. I would take a different approach if the firm is unwilling or unable to stop the spread of misinformation. Usually the non-compete agreement does not prohibit the former adviser from advertising his new firm as long as he does not solicit individual clients directly.

(More: How to make a U-turn after retirement)

So instead of running up huge attorney fees, use the money to develop a marketing plan that lets the community know that your friend hasn't retired to the Sunshine State. Let everyone know he is still available to help them accomplish their goals in a new and independent way. He'll never know how many of his former clients will see the ads, but he will introduce his firm to prospective clients to take the place of those he lost and get his new business off to a fast start without setting foot in court.

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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