Advisors thinking about breaking-away from wirehouse firms and pursuing an independent path have a lot of things to consider — the cost of establishing a new firm, setting up technological and practical workflows that will support existing customers while also pursuing new growth, and creating a business plan that will allow their new venture to thrive. However, for those advisors subject to restrictions on their ability to do business after leaving a large firm or wirehouse, another, equally important, set of considerations must come to the forefront. Here are a few things to consider for advisors subject to non-solicitation or non-competition contracts. (As always, nothing herein constitutes legal advice, and is presented for informational purposes only. Consult with an attorney regarding any contracts or agreements to which you are subject.) Terrana Group is partnered with several law firms that specifically deal with these agreements and in no way do these agreements prevent you from moving to a new firm, but it is strongly suggested that you obtain legal advice to completely understand your rights and the best way to protect yourself in a transition.
Non-Solicitation Agreements For Financial Advisors
A non-solicitation agreement is a contract between an employee and employer that is aimed at preventing an employee from soliciting his or her former employer’s clients. This type of covenant does not prevent a former employee from entering into new employment or establishing a new business, but is aimed at preventing a financial advisor from soliciting, or attempting to recruit, his or her existing clients to bring their business to a new firm.
Recent legal developments have changed the landscape of non-solicitation agreements for financial advisors. A recent decision in Edward D. Jones & Co., LP v. John Kerr (S.D.In. 19-cv-03810 Nov. 14, 2019), held that although non-solicitation agreements can be enforceable, their reach is limited by FINRA rules and the fiduciary obligations of financial advisors. In that case, a departing financial planner claimed that both FINRA Rule 2273 and his fiduciary duty as a certified financial planner required him to notify clients that he had changed firms. The court accepted his argument, finding specifically that the advisor had not used stolen or proprietary information to contact clients and that he only “inform[ed] his former clients of his new employment.” In addition, the advisor’s announcement was consistent with his employer’s guidelines for newly hired RR’s communications with clients, and thus, that announcements of a change in employment are standard practice in the financial service industry.
A simple announcement, then, of a change in employment, is not generally considered a “solicitation,” and is in fact consistent with both the obligations of advisors to their clients and generally accepted practice within the industry. So long as an advisor is not using proprietary information (stolen client lists or other intellectual property of the firm) to contact clients, simple information regarding an advisor’s move is generally not considered a “solicitation” by the courts.
What is more, there are things that advisors can do, during their employment, to maneuver around such agreements. The first is ensuring that your relationship with your clients goes beyond purely a working one. If your clients are also friends, and you are contacting them on a personal basis, courts are less likely to enforce non-solicitation provisions. Clients, after all, have a choice in their financial advisor, and clients whom the advisor has brought into the firm are more likely to move their business when an advisor changes employment.
The Effects Of Non-Competition Agreements
Non-competition, or non-compete agreements are more restrictive than non-solicitation agreements. A non-compete agreement states that if you leave your advisory firm, you cannot act as a financial advisor for a competing firm (including your own firm). Because courts are loath to enforce overbroad restrictions on an employee’s ability to make a living, most non-competition agreements have limits on their scope — both in terms of geography and time — that are supposed to be as narrowly drawn as possible to protect the firm’s interests in its trade secrets and intellectual property. A typical non-compete agreement, then, might restrict an advisor’s ability to join another firm or become an independent advisor within 50 miles of the former firm, for a period of time (usually somewhere between six and 18 months).
Some states, including California, North Dakota, and Oklahoma, ban the enforcement of non-competition agreements outright, while many other states restrict their use or limit them to higher-wage workers. Even if a non-competition agreement is unenforceable, though, the threat of litigation can be enough to scare some employees away from attempting to violate the contract.
If you are subject to a non-competition clause because of a contract you signed when you were hired or while you were employed at a firm, a critical part of planning your move to a different firm or RIA model is establishing exactly what you can and cannot do, and for what period of time, after you leave. Terrana Group is partnered with several law firms that specifically deal with these agreements and it is strongly suggested that you obtain legal advice in any transition to another firm.
The Impact Of The Protocol For Broker Recruiting
In 2004, a number of wirehouse advisory firms signed onto the Protocol for Broker Recruiting, which outlined practices that brokers who left large firms could engage in without running afoul of agreements with their former firms. The Protocol, which began life as an attempt by Merrill Lynch, Smith Barney and UBS Financial Services to reduce litigation costs created by attempts to prevent brokers from calling their former clients, permits brokers to move with five rudimentary pieces of client contact information after giving notice.
If a broker moves from a signatory firm to another signatory firm, the Protocol provides a “safe harbor” path — a list of do’s and don’ts that the advisor can use as a guideline. However, it should be noted that a number of larger firms, including Morgan Stanley, have recently left the Protocol, citing gamesmanship by smaller firms.
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