The persistent war between who controls clients and their assets is typically fought between wirehouses and their advisers. And that fight can get ugly, with these major brokerage firms taking advisers to court when the advisers leave one firm and join a competitor.
Legal action, in the form of temporary restraining orders, scares advisers, bewilders clients and buttresses the perception that broker-dealers should not be toyed with. Many firms adhere to an industry agreement known as the Protocol for Broker Recruiting, which makes it easier for advisers to change employers and bring along clients. But that industry truce has been weakened of late, as big firms, namely Morgan Stanley and UBS, have exited the agreement.
Turns out, it's not just the wirehouses that are flexing their legal muscles when it comes to taking action against advisers who jump to a new firm. Smaller financial services firms, including registered investment advisers, are throwing elbows in the skirmish to control clients and the lucrative revenue streams that flow from client assets.
In a lawsuit filed last week, Mercer Global Advisors Inc. sued an adviser who left the firm this month for a competitor, Mission Wealth Management. The adviser, Skyler Kraemer, began working at Mercer in 2013, and the firm is claiming he broke his employment agreement when he moved to Mission Wealth.
Mr. Kraemer, who could not reached for comment, allegedly took confidential information from Mercer, which included addresses, telephone numbers, fax numbers, email addresses and a slew of other personal or demographic information related to clients, to his new firm. According to the complaint, he admitted to taking information.
Mercer's business model is built on feeding leads to its advisers, according to the complaint, which was filed Aug. 8 in the New York State Supreme Court.
Client acquisition costs are high, and Mercer does not require financial advisers to hustle or chase after new clients, according to the complaint. Instead, "Mercer has discrete marketing and sales departments that are responsible for developing new business," and that marketing group feeds advisers 600 to 900 new clients each year, according to the complaint.
Brad Stark, one of the founders and chief compliance officer of Mission Wealth, did not return calls for comment. An attorney for Mercer Global Advisors, Jason D. Gerstein, also did not return calls.
"It's no longer just the large wirehouses engaged in this kind of litigation, it's also the smaller RIAs," said James Heavey, a partner at Barton LLP. "They're taking a page out of the big firm litigation play book. And what's ironic is that RIAs commonly recruit advisers from the large wirehouses."
"It's an attempt by the RIA to retain client assets and recurring revenue," Mr. Heavey said. "That will always drive the strategy for any of these firms when it comes to a departing adviser."
"What Mercer is effectively saying in its complaint is that the role of the adviser is to service clients," said David Gehn, a partner with Ellenoff Grossman & Schole. "Here is the lead. Your role as an FA is to service our clients that we bring to you. The adviser had nothing to do with client acquisition. Mercer did it for you."
Such reasoning, of course, gives short shrift to the adviser's work and dedication, in some cases over years, to helping clients meet their financial objectives. Did the adviser's effort keep the client at the firm?
RIAs routinely exalt the way they do business, pitching themselves as above the fray and focused on working with clients, not fighting over them.
Firms that are RIAs are supposed to be fiduciaries and free of conflicts that are inherent when a broker sells a mutual fund or shares of stock for a straight commission. And the RIA industry is seeing an unprecedented wave of mergers, and M&A in any business always leads to employees looking around at opportunities and perhaps eventually leaving for a competitor, potentially triggering more legal action.
A potential surge in complaints and temporary restraining orders by RIAs against advisers who move to a different employer is a potential mess for the financial advice industry. Don't fight over clients, guys.