A FINRA arbitration case showing the tensions between independent branches about recruiting moves and M&A deals ended in a victory for one of the largest enterprises at Advisor Group.
Nieman and Heaps both headed offices of supervisory jurisdiction for Royal Alliance when Niemann decided to join Cambridge in 2020. Upon his exit, Niemann had hoped that advisors who retained his services as head of an OSJ branch would make the move with him. But three decided to take their business to the branch led by Heapps.
Independent branches often affiliate with offices of supervisory jurisdiction, which are essentially branch offices handling regulatory and compliance issues, as well as additional areas such as marketing, technology, leads and discounted investment products. Independent financial advisors choose between being supervised by their brokerage's corporate office or going to a branch. Aligning with an OSJ can offer access to a branch's services and a smaller community within a large firm, even though advisors often have to pay extra for the arrangement.
Niemann claimed that Heapps violated Royal Alliance's guidelines about recruiting another branch's advisors, as stated in a presentation slide at a conference, and therefore needed to pay for the lost business.
Niemann's efforts for most of the past three years to gain restitution for the losses to his branch have come up empty. In the process of filing an arbitration claim and an earlier court case that never went to trial, though, he shed more light on
"This case does not present a situation in which a crafty managing supervisor unscrupulously lures away successful brokers not actively looking to move, and their books of business, into a competing firm with promises to the brokers of greener pastures at the new firm, and then expects such a disruptive raid not to have adverse financial consequences," the arbitrators wrote in a highly detailed ruling on the case.
The move by Niemann to Cambridge "made it impossible" for the three advisors to stay in the same position they held since joining the OSJ in 2013, the arbitrators said, noting the possible ramifications of allowing Niemann to collect restitution for the business he lost in their move.
"When productive brokers, who have built up good working relationships with their customers over the years, have the door closed on them at their place of work but wish to continue working in the industry, they should be able to do so without imposing a huge financial obligation on their new boss."
Advisor Group praises decision
Niemann and his attorneys didn't respond to emails sent to their law office and his current practice, Oklahoma City-based Adaptation Financial. Representatives for Cambridge declined to comment, citing a policy against commenting on litigation. While Niemann lost the arbitration case, he could still try to have the decision thrown out through another court case.
The arbitration decision was "gratifying for both Mr. Heapps and the others collaterally impacted by [the] claimant's allegations," attorney Spencer Smith of McAfee & Taft said in an email. "There was no question that the underlying business in question belonged to the advisors, who were very pleased with Royal Alliance and did not want to go along with a transition — orchestrated by the claimant (their OSJ) — to another broker-dealer."
He added that the ruling "recognized the free affiliation rights of the advisors" to stay with Royal Alliance but move to a new OSJ, which he called "a firm with which their clients are well-served and where the advisors are very successful."
Advisor Group is "pleased with the outcome of this arbitration as we believe it accurately reflects the facts of the situation," spokeswoman Jen Roche said in an email. "Brian continues to play an important role in the growth of our large enterprise practices."
The ruling contrasts with a broker "raiding" case that led to
In one other novel aspect of the case, the parties all had previous tenures with Signator Investors, a brokerage
Heapps
There is always "a lot of politics" involved with the relations between OSJs and their brokerages, according to recruiter Jon Henschen of Henschen & Associates.
"It's ultimately the advisor's choice whether they want to stay or go," Henschen said. "If a rep's not happy, you are free and clear to do whatever. Some of these OSJs can be rather controlling in not wanting their advisors to be able to go to other OSJs within a broker-dealer."
Lingering questions
The reasons for Niemann's decision to go to Cambridge in 2020 and the circumstances of the advisors going to his OSJ in the first place aren't entirely clear. Their practice had changed hands in an M&A deal,
Seven years earlier, Niemann paid at least $350,000 to acquire their prior firm, but "nothing in that contract expressly states or even implies that he permanently obtained the three advisors' books of business or a permanent income stream generated from those books of business," according to the ruling. The document describes their former firm as a "securities and insurance business" Niemann had purchased from a fourth advisor who wasn't involved with the case.
Niemann "set into motion a sequence of events which resulted in the termination of the business relationships" when he went to "a competing broker-dealer" and the three advisors left his OSJ, the ruling said. Using another industry term for the portion of an advisor's business received by their OSJ, the arbitrators found that, "It tortures the terms and purpose of the 2013 agreement to conclude that claimant's right to receive a continuing override on the three advisors' production at their new OSJ remained intact despite that termination."
Fast forward more than a half dozen years and past Advisor Group's purchase of Signator, folding it into Royal Alliance. In 2020, Niemann and other OSJ managers in a video conference for ex-Signator branches at Royal Alliance viewed a presentation slide that later "became the principal basis for the calculation of his alleged damages," according to the award. Niemann viewed the slide headlined "production group cross-recruiting policy" as a binding policy, which Heapps' witnesses in the case "sharply" denied in their testimony, the document said.
"Unless agreed upon by both managing executives in writing, the receiving manager will pay the resigning manager compensation equal to 5 years of full overrides on the transferring advisor," the slide said.
A few months later, Niemann made the decision to leave Advisor Group and Royal Alliance and go to Cambridge for his brokerage. In that situation, the advisors at his OSJ would either go with him to a new brokerage or make their own separate moves within Royal Alliance or to an entirely different firm. It's typical for
In July, Niemann filed a court case in the state court of Oklahoma City against Advisor Group and Royal Alliance seeking a restraining order blocking the advisors from going to the new OSJ. Niemann eventually dropped the court case, after Advisor Group cited the arbitration provisions of his independent contractor agreement requiring any disputes to be resolved through a FINRA panel. Nonetheless, the filing included a letter from Advisor Group's corporate counsel accusing Niemann of "multiple egregious violations" of his obligations as an OSJ manager.
In May 2020, Niemann had set up a video meeting with Cambridge CEO Amy Webber to recruit advisors from his branch and forwarded offers of production-based bonuses from the rival, the letter stated.
"You issued an ultimatum to several Royal Alliance advisors under your supervision wherein they were forced by you to make a quick turnaround decision — you were urging them to discontinue Royal Alliance affiliation and join Cambridge, and warning of immediate loss of service from you if they did not follow you," the letter said. "We separately will admonish Cambridge for its role in this inappropriate pre-recruiting effort."
The upshot
Neimann carried out his move to Cambridge without the three advisors from his branch in August 2020, and he filed the arbitration case against Heapps less than two months later. In their ruling, the arbitrators found that the other OSJ had never violated the policy stated on the presentation slide, regardless of whether it was a formal and binding rule.
"The discussions [Heapps] had with the three advisors in 2020 leading up to their transfer to his OSJ had been initiated by the three advisors (after they had decided to reject [Niemann's] May 2020 offer to move with him from [Royal] to a competing broker-dealer firm) and therefore did not amount to the practice of 'cross-recruiting' prohibited by the slide," the ruling stated.
The arbitrators found that Niemann, rather than the three advisors or Heapps, had created the whole saga through his own actions. They ordered him to pay $10,700 in fees for 10 hearing sessions, compared to just $562 in costs for Heapps.
"We return to a central question: Why did the successful, mutually advantageous relationship that had existed since December 2013 between [Niemann] and the three advisors come to an end in 2020 after more than six lucrative years?" they wrote. "The answer is clear: It was [Niemann] who was responsible, by deciding on his own, as was his right, to leave [Royal] and move to a competing broker-dealer."
