Transitioning within the financial services industry: What brokers must know before they go

There has been more movement recently by financial advisers within the financial services industry then there has been in years. Surprisingly, such movement is not a result of large recruiting packages or other methods to entice heavy hitters. Those days have all but ended as a result of the ongoing changes in an increasingly unpredictable and highly regulated industry. Large and small firms alike have changed the rules of the game and financial advisors aren’t sitting by to watch as their careers lose momentum as a result of restricted product choices, big firm credibility concerns, reduced product options, and reduced payouts. In this ever changing environment, it is more important than ever to seek competent legal advice for a smooth transition between firms.

Most financial advisors in the industry spend their entire careers focused on building their book of business and providing top notch service to their clients. They’ve built extensive referral networks within their communities and among their family and friends that they intend to build upon for years. They’ve created a book of business with a great deal of value and a stream of income they hope to rely upon through retirement. The problem: the value created by the financial adviser and the clients serviced by the advisor while at the firm belong to the firm. The response: financial advisors are transitioning from firm to firm and in many cases from “employee adviser” to “independent adviser” in an effort to own their books of business and control their careers. Every financial advisor can make a smooth transition by getting the answers to the following questions in advance of moving (Click here to view in a slideshow format):

1. Are my current firm and prospective firm members of the Protocol for Broker Recruiting? The Protocol for Broker Recruiting (“the Protocol”) is an agreement between hundreds of signatory firms including Morgan Stanley Smith Barney, Merrill Lynch, UBS, Ameriprise Advisor Services, Inc. and other financial institutions and RIA firms. The Protocol sets forth how financial advisers may legally transition from their current firm to their new firm in an effort to avoid litigation. It also addresses what information a financial adviser can take and what must be left behind. If your current firm is a signatory to the Protocol and the firm you are joining is also a signatory to the Protocol, you must transition according to the terms of that agreement. Financial advisers should be aware that certain Protocol firms have issued letters setting forth exceptions to the Protocol that can affect an otherwise smooth transition and that, while they must follow the Protocol, they will continue to be bound by the terms of any team agreements, partnership agreements and training agreements they have with their current firms.

2. Am I obligated under an agreement or contract with my current firm that will affect my ability to transition? Virtually all financial advisers will be bound by a non-solicitation agreement prohibiting solicitation of clients of the current firm after their employment terminates. Many such agreements also contain non-competition provisions. In addition to these standard employment agreements, financial advisers may also have other enforceable agreements related to training or loans. If you have an agreement or contract with your current firm, you must know what terms you have agreed to and what limitations exist with regard to contact with clients before you transition to a new firm to limit liability.

3. Is timing an issue? If you are worried about incoming commissions, consider the timing of your transition. You will also want to consider any loan payoff date prior to leaving and your ability to pay off or restructure that amount.

4. What percent of my clients are likely to transition with me? The likelihood depends on several factors including (a) the nature and length of client relationships; (b) the type of products and policies held by clients at your current firm; and (c) the contracts and agreements you have with your current firm. Financial advisers transitioning within the past year are reporting that 70-80% of clients are transitioning with them to their new firm.

5. Do I have an established client base? If you have serviced your clients for more than 4 years and you are their primary point of contact, you have likely built a relationship your clients will want to continue. At the end of the day, the financial services industry is about client relationships, service to clients, and the clients’ freedom of choice with their investments.

6. What can I take with me to my new firm and what must I leave behind? This will be determined by the contracts you have entered into with your current firm, the Protocol, or both.

7. Who can I talk to about my transition? Silence is golden. However, you should talk with your new firm to determine what procedures are in place to assist you with your transition and what kind of paperwork you’ll need to complete before you transition. Advice from legal counsel familiar with transitioning within the financial industry is highly recommended. Talking with anyone at your current firm is risky and may increase your exposure to litigation post transition.

A financial adviser’s individual circumstances along with his or her contracts will dictate what he or she must do to foster a smooth transition. Ultimately, it’s about understanding and managing the risks involved. Making a transition within the financial services industry, more than any other industry, is risky. However, the rewards can be significant. It’s critical to make the right decisions before, during, and after your transition. Although every financial adviser will have a unique set of circumstances relating to his or her transition, many of the tried and true risk management/strategy tools can be applied universally in every case. At a minimum every financial adviser will need a well thought out exit strategy, a thorough review and analysis of any contracts with his or her current firm, including team and partnership agreements, and a checklist of post-transition strategies to address limitations on the ability to compete and solicit clients.

It is clear that a current trend toward transitioning from one firm to another within the financial industry exists for financial advisers at every level of production. It is even more clear that financial advisers everywhere are taking advantage of that trend and the legal framework in place to support them. If financial advisers ask the right questions before they leave their current firms and create a strategic plan for use before, during, and after their transition, they will have a solid foundation for a smooth transition and may avoid facing years of litigation. If you are considering making a move, talk with a lawyer first to find out what you should know before you go.

Kimberley P. Cronin is a lawyer with Messner & Reeves, LLC. She can be reached at [email protected].

Disclaimer: The information contained in this article is not intended to constitute legal advice and should not be construed as such. For legal advice consult an attorney.