On Advice

Georgia decision on broker protocol could have wide impact

How will the four wirehouses react to this news?

Jul 9, 2018 @ 4:46 pm

By Bruce Kelly

Financial advisers relying on the protocol for broker recruiting to protect their ability to jump to a new employer will face more obstacles now that a Georgia state court has ruled that advisers with contracts requiring them to give notice to employers when they quit are not protected by the industry agreement.

Advance-notice provisions in contracts, commonly known as garden-leave provisions, are common for brokerage executives but less so for individual brokers or financial advisers at large firms. They require the employee to give notice to the employer two or three months before leaving the company. The employer doesn't come to work after giving notice — to tend, supposedly, to their gardens — but remains on payroll.

Many in the industry simply don't know what to make of the Georgia ruling. Will it be a factor for other state courts dealing with similar disputes between financial advisers and employers? Will it have an impact on employment disputes before arbitration panels under the aegis of the Financial Industry Regulatory Authority Inc.?

More importantly, how will the four wirehouses, which have been watching their advisers continue to leave for regional and independent broker-dealers as well as registered investment advisers, react to this news?

The court in Georgia regards garden leave notices as trumping the broker protocol agreement, and the wirehouses employ some of the toughest attorneys in the business. Will those attorneys now introduce garden leave provisions into new versions of work agreements to make it more difficult for advisers to head to a new employer?

Many advisers at the four wirehouses — Merrill Lynch, Morgan Stanley, UBS Financial Services Inc. and Wells Fargo Advisors — are on tenterhooks these days, worried that their employers will take steps to make it more difficult to move to another firm with their current clients. Morgan Stanley and UBS dumped the protocol last year.

Last month, for example, a number of Wells Fargo advisers freaked out when the firm sent a memo about the firm's client privacy policy, claiming that the memo undermined the firm's commitment to the protocol for broker recruiting. A Wells Fargo spokeswoman responded by saying that the firm remains committed to the agreement.

Some financial advisers are increasingly paranoid, and the Georgia ruling, which came late last month, could add to that feeling.

"The decision, involving advisers who jumped to Morgan Stanley from Aprio Wealth Management in 2014, holds that those who agree to give their employers advance notice before quitting aren't absolved of that duty by the terms of the industry accord," according to an article by Bloomberg News. "It could complicate job changes for many U.S. brokers and registered investment advisers who work at firms that are members of the protocol for broker recruiting."

Before the Protocol for Broker Recruiting was put in place in 2004, large national firms would routinely sue advisers and each other when brokers were recruited to leave one broker-dealer to work at another. Firms filed temporary restraining orders and froze client assets during the litigation, hoping to persuade some of the advisers' clients to stay.

The agreement allows an adviser to carry a limited amount of client information to a new employer.

Four of Aprio Wealth Management's financial advisers had employment agreements requiring them to provide advance notice 90 days prior to resigning. On April 4, 2014, those advisers all abruptly resigned and immediately transitioned to Morgan Stanley Smith Barney, along with Aprio Wealth's chief compliance officer and most of the firm's junior and administrative staff.

Aprio Wealth's holding company sued the advisers for breaching their employment agreements and later added Morgan Stanley Smith Barney as a party, alleging tortious interference with Aprio's contractual relationships and that the firm had engaged in unfair competition by raiding Aprio Wealth.

According to an Aprio spokesperson, Morgan Stanley Smith Barney took the position the protocol precluded enforcement of notice of termination provisions.

It would be hard to imagine that those cagey wirehouse lawyers have not at least looked at adding garden leave provisions to advisers' contracts. Eager to have control over advisers' clients, the wirehouses started this current battle over the protocol and they're not about to stop it.


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