How financial advisors can avoid legal trouble when switching firms

Voices: How financial advisors can avoid legal trouble when switching firms

February 21, 2021 8:20 PM

For financial advisors looking to move their practice to a new firm, making the transition is rarely a simple process. With so much at stake, there is a long list of complexities and considerations that must be taken into account, from compliance issues and fiduciary responsibilities, to professional ethics and legal and procedural obligations. Understanding that process and handling the move with strategic deliberation is critical to mitigating risk and minimizing liability.

While securing the services of an attorney experienced in this specialized space is strongly advised in order to successfully navigate the minefield of potential issues during a transition, it’s also important for financial professionals to educate themselves about the dos and don’ts.

With that in mind, here are the top five considerations for financial advisors to keep in mind before, during, and after a transition. Following these five suggestions can help you limit the risks and potential liabilities of a transition and allow you to begin your new position focusing on your clients, looking forward and not in the rear view mirror.

Plan ahead

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Make sure you get sound legal counsel and professional advice before your transition. Planning ahead is critically important and engaging an attorney early in the process can help you avoid or resolve a lot of potentially costly headaches before they become a problem down the road. An attorney can assist with not only legal advice to make sure you’re on sound legal footing, but also with the practical elements that are so often overlooked; for example, what your agreement exactly requires and if the Broker Protocol applies to you, how and when to submit your resignation, how to draft the letter to make sure you say the right things, what kind of client contact is appropriate, and other small-but-essential details.

Stay out of the gray area

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Understand and abide by your legal and professional obligations. An experienced attorney can chart you on the right side of the line and outside of the gray areas. Knowing what you can do is just as important as knowing what you can’t do. For example, generally you can talk to your new employer, sign agreements, set up office space, and more—all before your official resignation, as long as you provide 100% effort to your existing employer (business as usual, same number of client visits, etc.). On the flip side, even something as small as downloading one file, sending one email to a personal account, or an increase in copier usage can be potentially used against you—so don’t take anything for granted. Assuming both your current and future firms abide by the industry-standard Broker Protocol, there’s a clear set of professional guidelines that, if followed with precision, that stipulate what’s permissible during a transition.

Keep it quiet

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The golden rule of any transition is to not tell any of your clients beforehand. Don’t make exceptions, no matter how important you believe the client is or how much you think you can trust him or her. Everything you say (both before and after you leave) will inevitably get back to your firm. There is no such thing as “off the record” in these circumstances. Once you’ve moved on, there are ways to promote the new firm, but don’t bad-mouth your former employer.

Read the fine print

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Read the terms of your employment agreement carefully. Agreements differ case-by-case. There are likely to be specific details on how to handle records and documentation. There may be geographic or time restrictions on your actions. Every agreement and every situation is different. Keep in mind that if you claim your current agreement is unfair, signing a new agreement with similar restrictions could hurt your argument. Watch for punitive fees or overly restrictive terms and adjust accordingly. If there’s a chance you might have to spend $50,000 in legal fees, for example, it might make more sense to renegotiate your current agreement and revisit things a bit down the road.

Talk the talk

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Bloomberg News

Finally, coordinate your actions with your new employer. Connect with your new firm and talk through its expectations and your plans and obligations for the transition before you plan and make your move. Maintaining open dialogue with your future employer and securing its buy-in throughout the process can literally and figuratively pay off.