Under a change in strategy and recapitalization by its private equity backer and new secondary investors in recent years, Hightower has adopted the brokerage firm tactic of suing ex-advisors.
The Chicago-based RIA consolidator claims that financial advisor Michael Policar “stole Hightower’s confidential and proprietary information, trade secrets and solicited Hightower clients for the benefit of his newly created competing company,” according to a lawsuit the firm filed Jan. 14 in Chicago federal court. Last January, Policar launched
Before
Without citing any evidence for its accusations in the lawsuit, Hightower claimed that Policar used confidential information and made phone calls “in order to avoid leaving a paper trail of his wrongful behavior” when reaching out to clients about the new RIA. Although it didn’t specify what information was confidential, the lawsuit has a list of clients’ names. “It would be difficult, if not impossible, for Policar to start an unknown RIA firm and have 30 clients so far without client information obtained during his three-year employment with Hightower,” according to the lawsuit. Hightower filed it in federal court last month after initially going to a county court.
The filings include an apparent reference to the
Policar denies that he breached the client solicitation agreement in any way, according to Terwilliger, who said that many of the clients listed in the complaint have no relationship with the RIA while those of others predated his time at Hightower in his career over the past decade.
“They're people that he's worked with for some time,” Terwilliger said. “He was surprised and disappointed because he believes that he's done nothing wrong. He believes that he was very responsible in his departure from Hightower.”
Growing deals and complexity
News outlet AdvisorHub first
The filings display the level of complexity involved with wealth managers’ industry classifications and the many complicated issues behind recruiting moves, RIA launches and asset transitions. Even though most observers would group Hightower with fellow RIA platforms and consolidators such as Focus Financial Partners, Captrust, Beacon Pointe Advisors or Dynasty Financial Partners, Hightower’s Oros sits on the board of the Financial Services Institute alongside executives and advisors from independent brokerages. Adding to the confusion, the other firms that are part of the independent brokerage trade and advocacy group rarely, if ever, file solicitation or trade secret lawsuits against ex-advisors.
Hightower “operates as a national wealth management firm/RIA and has a securities broker-dealer in house to support its advisors,” spokeswoman Patty Buchanan said in an email. The company
“Hightower is wholly focused on driving industry-leading organic growth and on RIA acquisitions. The company made a conscious shift away from wirehouse liftouts and its partner/affiliate structure starting in 2018,” Buchanan said. “Even though Hightower is focused on growing by partnering with RIAs, these deals are true acquisitions, not just contractual relationships. That means firms that join Hightower agree to long-term relationships with Hightower, and those principals give us appropriate restrictive covenants in exchange for being rewarded for the business they built. Clients become Hightower clients, and we partner with those principals to continue to grow our business together. In fact, Hightower now owns 98% of the revenues of its advisory businesses."
She added: "For those advisors who leave Hightower under this model and don’t live up to their contractual commitments, such as taking our confidential information or soliciting our clients, we take appropriate legal action to enforce these reasonable expectations.”
Regardless of the vagary about its specific classification, Hightower occupies a giant foothold that’s rapidly growing. The firm has 122 advisory businesses with $104 billion in assets under management as of Sept. 30,
Moves of any size are complicated
Acquisitions or recruiting moves in which a practice or enterprise changes its brokerage or RIA affiliation rather than selling any equity are rising in volume and intricacy amid the industry’s record consolidation.
For example, Madison, Wisconsin-based CUNA Brokerage Services will make what’s likely to be
“You have to learn a new system, new technology, so there is a lot of change management that goes along with something like this,” he said. “The big priority was to find a partner where we could combine the strengths that we bring to the table. Our strengths certainly revolve around helping advisors and financial institutions grow and be successful in this business. What we felt we were lacking was the technology suite.”
In theory, the transition of a sole practitioner such as Policar should pose many fewer issues than that of a massive enterprise like CUNA. The Hightower lawsuits leave an opening for the firm’s expanding number of competitors for business among RIAs to argue that they could face a legal case if they should ever decide to leave the firm someday. Before agreeing to any kind of deal, advisors should think through “long-term ramifications” such as what could happen if the purchaser itself changes hands, conflicts of interest with certain products and limitations on the practices, according to John Sullivan, Dynasty’s head of network development.
“Advisors are discovering that there are several models that tout independence but may offer something less than the title suggests,” Sullivan said in an emailed statement. “We believe that captive is captive, and full independence is independent; it’s the gray area in the middle that has been created with firms that are calling themselves independent that, in reality, are not. We encourage advisors to take their time and do complete due diligence to avoid surprises and disappointment later. If you are seeking full independence, make sure that is what you get.”
The lawsuits that come in the wake of such transitions don’t usually succeed in
