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Tips to Avoid Getting Sued When You're an Advisor Jumping Ship

By Rita Raagas De Ramos February 21, 2018

Advisors who join broker-dealer firms don’t typically plan their exit from that firm on Day One of signing their contracts -- or even months or years later -- which is why they might leave a trail of breadcrumbs to use against them when they choose to leave, experts say. When the time comes for advisors to jump ship -- either to join another broker-dealer firm, an RIA or to set up their own independent practice -- their old firms tend to have the ability to dig up the advisors’ contracts or past actions to make their case against them, whether in court or in arbitration.

While there’s no guarantee of a smooth transition when it comes to advisors leaving their firms and taking clients with them, a lawyer and headhunter shares with FA-IQ some tips that can better prepare advisors who are in the early stages of thinking about leaving their broker-dealer firms and help them avoid getting sued.

Departing "advisors are doing a lot of things wrong, otherwise they wouldn’t be slapped with TROs," says Ron Edde, San Diego, Calif.-based president and CEO of recruitment firm Millennium Career Advisors. Broker dealer-firms "are getting very good at forensically ferreting out improprieties from departing brokers. I think a lot of times the brokers think the firms are not going to make the effort or have the capabilities to do that, but those brokers would be sadly mistaken."

Morgan Stanley has won four temporary restraining orders out of five complaints it filed against former advisors since it exited the Protocol for Broker Recruiting on November 3. One case remains pending in court.

"Morgan Stanley has been the most aggressive in terms of pursuing TROs," Edde says. "That is not to say that Citi and UBS will not follow. I’m sure that they are watching with great interest the efforts and travails of Morgan Stanley" in relation to departing advisors. UBS exited the broker protocol in December, while Citigroup left in January.

When it comes to disputes involving advisor movements, Thomas Potter, Nashville, Tenn.-based partner at law firm Burr & Forman, has clients on both sides. He sometimes represents broker-dealer firms against advisors who've left, and when advisors join the firms. But he also has experience representing the advisors themselves.

Potter says that while each case is unique, there are basic steps advisors can take to "minimize the risk" of being sued, noting he has a three-page "Checklist of Do's and Don’ts" that he discusses with his advisor clients.

There is a better chance of avoiding a lawsuit when advisors seek "attorney-client privileged advice early enough" while still at the firm, for it becomes an exercise in preparing a defense when advisors have already left their old firms by the time they seek counsel, he says.

Here are some basic tips, according to Potter:

  • Look for and review the contracts/agreements you signed with your firm.
  • Review how you handled customer information.
  • Don’t tell customers in advance that you are leaving your firm.
  • After leaving your firm, limit the content of your communication with former customers.

Look for and review the contracts/agreements you signed with your firm

That first tip from Potter may seem rudimentary, but he says often advisors can’t even find the contracts or agreements they signed with their firms.

"There’s always an agreement but many say they can’t find it or don’t remember what’s in it -- and that’s because they signed it maybe five, 10, 30 years ago," he says. "They should have a copy of their contracts but more often than not, they do not."

He adds that there’s usually "some kind of check-the-box screen in their annual compliance certification where they re-acknowledge their contract," and it wouldn’t be surprising to find updates or revisions that advisors may or may not be paying attention to while they are still happy to be employed at their firms.

“Advisors are doing a lot of things wrong, otherwise they wouldn't be slapped with TROs.”
Ron Edde
Millennium Career Advisors

Review how you handled customer information

Potter says advisors should make sure they haven’t printed or downloaded and taken any customer information home or sent it to their personal email accounts.

"Very often they have done that in a very well-intentioned way to advance the purposes of the firm that they are working for," he says. "For example, they may have planned to do some work over the weekend. Maybe they did that three months ago or last year."

That becomes an issue when advisors leave their firms and attempt to take clients with them, he says. "All of a sudden you realize you have customer information sitting at home in a file drawer or on your computer that you previously forgot about."

Potter says he’s been representing both parties in these disputes "for a long time," so "I’m never surprised anymore that there’s always some goof-up somewhere."

In instances where this hasn’t happened, being aware of the repercussions helps advisors, he says. In instances where this has happened, being aware of the customer information and when it was appropriated helps with the advisors’ defense, he says.

"Knowing that this information is out there allows you to deal with it upfront instead of getting blindsided by it when the first time the court hears anything about it is when it its presented as a theft of company information," he says.

Potter stresses to advisors: "Don’t walk out the door with customer information beyond [what] you’re entitled to take."

For advisors whose old and new firms are signatories to the broker protocol, the pact lets them take the following account information: client name, address, phone number, email address and account title of the clients they serviced while at the firm -- and nothing more. The pact also lets them solicit customers they serviced while at their former firms, but only after they have joined their new firms.

"If the protocol governs, you would want to be very meticulous in providing that specific customer list to your branch manager as you depart. Typically there’s a practice that brokers usually leave on a Friday afternoon at about 2:00 p.m. to 3:00 p.m., preferably on a long holiday weekend. That gives the departing broker a head-start on smiling and dialing -- and then there’s a race to the courthouse on Monday or Tuesday, whichever is the next working day," Potter says.

For advisors whose old firm is not a broker protocol signatory, it is imperative they review and follow their agreements, he says. There could be ways to argue against those agreements, however, such as if they can be interpreted as unfair or detrimental to employees, he says.

While still employed at the firm, Millennium Career Advisors’ Edde believes advisors should "maintain a Christmas card list" of client names, email addresses and phone contact numbers that they shouldn’t print from company computers or send to their personal computers or devices.

"The phone book doesn’t belong to Morgan Stanley. That kind of information is readily available and can be obtained by anyone, including an advisor who is contemplating changing firms," he says.

He believes advisors should also "connect to as many clients as possible via social media -- preferably LinkedIn." He says the normal notification that LinkedIn connections get when someone changes employment details in a profile "should be fine."

Don’t tell customers in advance that you are leaving your firm

Burr & Forman’s Potter says many advisors end up telling their clients they are leaving their firms, and it's usually well-intentioned because of the established relationship between advisor and client. But "that’s a breach of your duty to your employer if you do that while you’re employed," he says. "That puts you on a slippery slope because the house will argue that there was no reason to mention that to a customer except to explore whether they would follow you."

In instances where an advisor signed a non-solicitation agreement that covers a specific period -- typically one year -- after the end of employment, determining whether solicitation occurs is "not straightforward," he says.

It depends on the specifics of the case, and the final determination is done by the judge presiding over a TRO or injunctive relief complaint and, after that, by the Finra arbitration panel that gets assigned the case, he says. When a court issues a TRO, an arbitration hearing on the request for permanent injunctive relief will begin within 15 days, according to the Finra arbitration rules.

While Millennium Career Advisors’ Edde agrees advisors shouldn’t "under any circumstances convey to clients any intent to move to another firm in advance of actually doing so," he believes they can -- and should -- "take their clients’ temperature."

Over time, advisors should find out if their clients are with them because of their relationship or because of loyalty to the broker-dealer firm, he says.

"Meet with as many top clients as possible preemptively and discuss how they feel about your relationship. Carefully document the topics you discussed in those meetings," he says. "Be careful the way you pose your questions. If they smack of ’I’m thinking of going to this or that firm, would you come with me,’ that crosses the line."


After leaving your firm, limit the content of your communication with former customers

Advisors should be very careful about the content and target of any communication they send out after they have joined a new firm or set up their own firm, says Burr & Forman’s Potter.

Once advisors have left their firms they should limit their contact with former customers to a "wedding announcement" type of communication that shows they have joined another firm.

There’s "sort of a sliding scale on how aggressive" advisors want to be in the announcement, and that usually depends on the advisors’ "risk tolerance" and what they have been able to find out about their agreements, Potter says.

The "safest possible" sort of wedding announcement type of communication is one that is "more plain vanilla and more widely distributed than just your book of business," he says. This could include a billboard, an ad in the newspaper, or a LinkedIn post along the lines of so-and-so advisor "is pleased to announce that she’s now affiliated with X and her new contact information is Y."

He says an email sent only to former clients could be considered solicitation "because you’re specifically targeting just that group of people -- your clients."