A one-paragraph amendment to an employment contract signed a decade ago may help a former $600 million Morgan Stanley team retain their clients after they left to work for RBC.
The amendment’s wording is playing a key role in ongoing litigation between the wirehouse and the advisors, who parted ways with
“The customers rightfully belong to the Martin Team,” the advisors’ legal filing states.
The dispute, which has moved from federal court to FINRA arbitration, shines a light on the importance of exceptions that allow advisors to hold onto clients they brought to a firm if they later leave. A carve-out for pre-existing client relationships may be becoming a more common request in recruiting deals, lawyers say. And it could play a role in preventing legal disputes from arising or, in this case, resolving them in advisors’ favor.
“If I was representing a group that was getting ready to leave a large firm, I would tell them that unless your next employer will agree to a carve out, I’m not going to recommend you go there,” says Bill Singer, an attorney not affiliated with this case.
Morgan Stanley and the advisors’ attorney, Tom Lewis of law firm Stevens & Lee, declined to comment.
‘If we ever left the firm’
The Martin team — composed of Arthur Martin, his son Wade, his grandson Zachary, and Brett Scharf — joined Morgan Stanley from UBS in 2010. Arthur Martin, who had been with UBS and predecessor firm PaineWebber since 1976, says he was reluctant to change firms, but was convinced to do so after Morgan Stanley promised that his existing client relationships would belong to him.
“We were told by Morgan Stanley that we ‘owned’ the client relationships. Further, with the support of Morgan Stanley senior legal counsel, we were told that no other Morgan Stanley advisors would solicit, contact, or service our clients if we ever left the firm in the future and that we ‘owned our book of business and relationships,’” Arthur Martin says in a legal filing.
The Martin team got that promise in writing.
The Morgan Stanley financial advisor employment agreement the team signed Aug. 19, 2010 states that for a period of one year following termination of employment, advisors may not solicit any Morgan Stanley customers “who were serviced by you, or whose names became known to you, while in the employ of” the firm.
The amendment, or carve-out, secured by the Martin team overrides that standard language. The Martin team added wording that states that “upon termination of employment for any reason, employee may solicit and attempt to solicit, directly or indirectly, those customers whom he/she serviced prior to employment with” Morgan Stanley. The employment agreement was filed in federal court as part of the litigation between the two sides.
Attorneys not affiliated with the case praised the Martin team’s foresight in securing the carve-out in the first place.
“These guys had good [legal] counsel, whoever did this for them,” says Ross Intelisano, founding partner of law firm Rich, Intelisano & Katz.
It’s complicated, but possible, to limit risk and liability when moving a practice.
Carve-outs becoming more common
At the time the Martin team moved to Morgan Stanley, the firm was still a member of the Broker Protocol, an industrywide pact that permits advisors to take basic client contact information with them when switching employers. Morgan Stanley and UBS
Though carve-out clauses have existed for years, they are becoming more common today, industry insiders say.
“These are more standard in the business for non-protocol firms to make the advisors comfortable that, so long as they pay their [promissory] note off, they can take the clients that they brought in. It gives them agency,” Intelisano says.
Carve-outs are even being sought by teams moving to protocol firms because, as insiders note, who knows what the future holds. Firms merge, office cultures change, branch managers get replaced, and brokerages can leave the protocol with short notice.
Advisors and teams with bigger AUM and production are more likely to secure a carve-out as part of the recruiting process, experts say.
“They’re like prenuptials. Most people who get married don’t have a prenup. Who does? Wealthy people,” Singer says.
‘A good reputation’
Of course, having a carve-out provision doesn’t protect an advisor from facing legal action. The Martins’ carve out, and others like it, require repayment of outstanding promissory notes. Attorneys also note it’s not a get-out-of-jail free card; advisors can’t take confidential company documents with them when they walk out the door, for instance.
Morgan Stanley filed its legal complaint against the Martin team in January, about three months after the team had left Oct. 2 to join RBC in Princeton, New Jersey. When the team worked at Morgan Stanley, they managed about $600 million in client assets and generated $6 million in annual revenue, according to Morgan Stanley’s lawsuit filed in federal court in New Jersey.
About $200 million of client assets had transferred to RBC by early January, according to Morgan Stanley.
Arrogance, naiveté and that chief suspect, procrastination, can all undermine best laid advancement plans, writes recruiter Mark Elzweig.
Among other claims, the wirehouse says that the day after the Martin team resigned, Saturday, Oct. 3, “many and perhaps most of the over 300 client relationships” served by the advisors received mailings from the group. That same day attorneys representing Morgan Stanley sent a letter to the Martin team’s legal counsel demanding that the Martin team not violate their non-solicitation agreements. Morgan Stanley claims this and other letters went unanswered. The wirehouse claims that a few clients, which are not named in legal documents, have told Morgan Stanley that they have been contacted by the advisors. The firm also contends that one of the advisors, who joined the team after it moved to Morgan Stanley, has solicited clients and is not protected by the carve-out clause.
Morgan Stanley further claims that one of the advisors emailed a client presentation to himself, and that the firm has demanded this be returned to Morgan Stanley if the advisor still has it.
For their part, the advisors deny the allegations, asserting in their legal filings that they have not solicited any clients that they are not permitted to solicit. Clients covered by the agreement comprise approximately 80% of their book of business, according to the team. They also say Morgan Stanley has been telling clients that Arthur Martin retired from the business.
“I have worked very hard to establish an excellent reputation in the community and my profession. ... A good reputation is critical to a financial advisor’s livelihood, and thus critical to my family, my team and me,” Arthur Martin says in a court filing.
After a judge granted Morgan Stanley a temporary restraining order Jan. 22, the dispute moved to FINRA arbitration where a panel of three arbitrators will hear both sides’ claims and evidence. In the meantime, other advisors may contemplate the value of a carve-out clause for their existing client relationships.
“If you’re an advisor thinking of moving, a carve-out clause for your current clients is something you should pursue very hard. It’s an important tool to give you the agency to leave, pay off your note and still be able to keep your book,” Intelisano says.
