It should be of no surprise that a number of financial advisors frequently make the decision to transition to another firm in order to better serve their clients, especially if they no longer agree with their current firm’s policies and procedures. This is increasingly true today when numerous financial institutions have misled both investors and financial advisors alike by failing to disclose the risks involved in some of the products they promote and design.
In most circumstances moving to a different firm is relatively simple; however, there are instances in which leaving a firm can resemble a nasty divorce. One such circumstance is when there is a suspicion that the firm may be thinking of parting ways or moving clients to less experienced and less costly advisors who may be more willing to promote the products the firm is pushing.
Before making the transition to a different firm, financial advisors should be prepared for a worst-case scenario in the rare occasion one actually does arise. It is better to make a reasoned and strategic decision that will minimize any potential problems that could end up affecting financial advisors and the relationship with their clients. Below are a few recommendations financial advisors should contemplate before making the move.
► Make sure you have gathered and reviewed all written agreements with your employer. This includes, but is not limited to employment agreements, stock option agreements, promissory notes or forgivable loans, non-compete agreements, and non-solicitation agreements. It is important not only to review these documents but also to understand exactly what is in them before you make your move. You may have forgotten much of the information contained therein, or never even noticed some of the terms that could affect your transition away from the firm and put you at a significant disadvantage after your departure.
► When moving to a new firm, make the most of the legal expertise available at the brokerage where you are transferring your license. Most firms have access to either in-house or outside counsel who may be very knowledgeable about these issues; however, don’t solely rely on their advice. Keep in mind that the legal talent at the new firm is looking out for the best interests of the firm and only looking out for you to the extent that your interests merge with the interests of the firm. For example, there may issue on your U-5 that might not concern your new firm but could nonetheless affect your record and your reputation for years to come.
► Determine if the firm you are making the transition from and the firm making the transition to are “protocol” firms. If so, following the guidelines can make your transition much smoother. If both firms are not “protocol” firms, don’t make the mistake of assuming that the same type of rules will apply. Without a “protocol firm” to “protocol firm” transfer in place, a number of legal issues may arise.
► Although it may seem trivial, consider how you are going to remove your personal property from the office. Removing all of your personal belongings too early or too conspicuously may result in management taking action against you before you can voluntarily transition to another firm. On the other hand, not having a plan to remove your personal property may lead to unintended consequences, like management scouring through your documents as soon as you leave the firm in search of evidence that might be used against you.
► As for your actual departure, resist the urge to say or write anything that may not be in your best interests from a business (and legal) perspective. Some advisors make the mistake of falling back on their “manners” and making unnecessary positive statements about the firm when in reality they are leaving because of the firm’s unethical behavior. Other advisors get emotional about leaving the firm and, in an effort to “get it off their chest,” write or say things in the heat of the moment that could later hurt their business or have potential legal consequences. Keep in mind that, in most circumstances, you are not legally required to explain why you are leaving the firm.
► If you have an outstanding balance pursuant to a forgivable loan/promissory note, do not assume that the brokerage firm you are transitioning from will forgive repayment of the balance based on an unwritten “understanding.” Many financial advisors mistakenly believe that they will not be pursued for repayment because management told them they wouldn’t or because other advisors have not had to repay in the past. Recently, many, if not most firms are taking a much harder and more aggressive approach in attempting to fully collect on these notes once a financial advisor leaves the firm. While representations made to you about the firm’s practices may allow your lawyer to prevent the firm from ultimately succeeding on its claims against you, it is extremely likely that your former firm will file a FINRA arbitration claim against you seeking repayment for the full amount. This should be factored into your planning.
► Before you make the move, talk to an attorney with the experience to help you through the transition to a new firm. By being proactive, you may reduce the risk that a dispute will arise after you leave the firm; or, in the event that a dispute does in fact arise, you may improve the chance that you will ultimately prevail.
Vernon Litigation Group is a Naples, Florida based law firm that represents stockbrokers and financial advisors in employment disputes against brokerage firms and financial institutions. Vernon Litigation Group also represents investors who are victims of stock fraud and stock losses brokerage fraud. Our attorneys are experienced in securities arbitration and litigation and are currently representing multiple financial advisors in disputes against their former employers in FINRA arbitration.
For more information, contact:
Christopher T. Vernon, Attorney at law
Susan Healy, Attorney at law