When planner Thomas Balcom left his firm in 2010 to start 1650 Wealth Management in Lauderdale-by-the-Sea, Fla., he faced a common challenge: His non-solicitation agreement prohibited him from contacting certain clients and taking any client files.
Yet Balcom was ready. Because he had already connected with his clients via social media sites, such as LinkedIn, the clients who were interested in contacting him were able to do so following his departure. Balcom estimates that more than half of his clients eventually joined him at his new firm.
"A client would say, 'I worked with my planner for X number of years and now that he's gone to another firm, I still want to work with him,'" Balcom says, spelling out the classic debate that often follows a planner's change of venue. "The firm would say, 'No, you are our client.' And then the client would reply, 'But you don't know me, you've never talked to me and now you're forcing me to stay with you?'"
Planners weighing a change and practices looking to recruit new advisors need to understand the intricate footwork that must be done when a planner exits a practice. Advisors need to have in place a clear game plan and messaging strategy for the change; they may also face strict rules on whether - and how - they can solicit clients from their prior firm.
Of course, not every parting is hostile. When planner Gregory Alerte told his boss at an independent broker-dealer that he was going to leave to start his own shop, he told the senior partner that he would only be soliciting clients he had brought to the firm personally.
The senior partner was less worried about client flight, Alerte says, and more displeased because he had been eyeing the young planner, now 30, as a possible successor. The partner ultimately gave his blessing, but asked Alerte not to inform clients until he had actually opened the doors to his new practice in Woodbury, N.Y.
Because Alerte remained with the same broker-dealer, he says, he and his former boss continue to work jointly with some clients, and the prior firm's partners sometimes send him younger prospects - particularly the children of established clients. "We structure the relationship so that the prior firm is still involved," Alerte explains. "The partners never felt like we were taking away any of their own clients."
Any advisor considering an exit plan needs to understand their current firm's policies, says Jennifer Woods Burke, a Jersey City, N.J., securities attorney and the founder of compliance consulting firm CompliGuide.
Some firms strictly adhere to contracts dictating whether planners can take clients with them if they leave, Burke says. Many contracts include covenants that prohibit solicitation of clients within a set time frame after a planner leaves, or within a certain geographic radius of the firm - although, she adds, some states do not allow enforcement of such covenants.
Either way, "it's critical for planners to recognize who 'owns' what," she notes. If planners don't have a strategy before they start their own firm, they might run immediately into problems, she says.
"A planner could get very distracted before their firm gets off the ground with administrative, regulatory and legal issues," Burke says. "Plus, they probably won't have any income coming in - funds that they may particularly need to hire people to help them get out of hot water on those fronts."
It's best for planners to talk to the senior partners of the firm they are leaving and try to find a deal that works for everyone, she says. "By and large, these types of disputes are typically resolved, due to the cost of litigation - and in many cases a healthy percentage of clients can move with planners."
Sometimes an agreement up front can function as a business prenup, avoiding painful and costly disputes at the end of a relationship. Before Arthur Stein joined an independent firm affiliated with Raymond James in 2009, he ironed out an agreement stipulating that he "owned" his clients - and that he could solicit their business if he left the firm.
That paved the way for Stein to strike out on his own last year and start a firm in Bethesda, Md.
"I've been in this business for over 20 years and I wouldn't have gone into a firm without negotiating the rights to my clients," Stein says. "It has to be negotiated in advance so that people don't end up in fights over something they could have agreed upon earlier."
Advisors should consult with a securities lawyer as well as the compliance departments of both current and future firms before soliciting clients from their prior firm, suggests Mark Cussen, a CFP in Leavenworth, Kan. "Of course, a firm that is losing a million-dollar producer will fight harder to keep that book of business than if they were losing a planner who generated a fraction of that income," Cussen says. "In some cases, it might just be safer for advisors to just offer their new business cards to their clients and tell the clients to call them."
Of course, advisors may not want all their clients. A move offers planners an opportunity to cull their book of business, Ray Adams, a TD Ameritrade Institutional vice president in Richmond, Va., told would-be job changers during a recent online seminar. "Advisors can potentially walk away from nonproductive or smaller clients," he says.
Adams encourages job changers to develop transition and communication plans to inform clients that they are moving. Some advisors give clients a "transition package" that includes necessary paperwork if they also choose to switch; others host social events at their new office.
Advisors at independent broker-dealers may be covered by the "broker protocol" signed by more than 800 firms and aimed at ending litigation over broker exits, says Jack O'Hara, director of business development at National Compliance Services in Delray Beach, Fla. If so, they may immediately begin calling old clients after they resign, says O'Hara, whose firm offers compliance services to RIA firms and independent broker-dealers.
Once planners establish a new firm and contact clients - presuming they're not restricted from doing so - they can send transfer forms to get clients' holdings into the custody of the new firm, O'Hara says. After that step has been finalized, planners can then talk to clients about potential changes to their portfolios.
LAYING THE GROUNDWORK
Before Balcom alerted his prior boss that he was leaving, he had already taken steps to start his RIA firm: He formed an limited liability company, prepared the requisite paperwork with his state regulator and the SEC, leased an office, arranged for phone service, and had a website and letterhead ready to go.
But he had to start over with clients, asking even those he'd worked with to complete risk questionnaires and limited power of attorney forms.
If an advisor is ready to head to the exit, Balcom advises getting prepared before they tell the boss that they're leaving - because once they've done so, employers may want to sever the relationship immediately to decrease the opportunity for client information to leave with the advisor. Quite often, he says, "the employer will escort the resigning planner to the door."
Katie Kuehner-Hebert is a writer in Running Springs, Calif. She has contributed to American Banker, Risk & Insurance and Human Resource Executive.