The Trend: Financial Advisors Switching Firms
Back in 2011, the Aite Group, a Boston-based financial industry research and advisory firm, released a study predicting that 2012 and 2013 would see an increase in the number of financial advisors switching firms. Although I have not seen the current data, anecdotal evidence suggests that Aite’s prediction was correct. Over the past three years, I have seen numerous instances of firm switching. I have read about numerous cases involving financial advisors and their former firms litigating over customer relationships. In many instances, these cases also involve the new company. The standard scenario (a pure hypothetical): John works for Morgan Stanley as a financial advisor and has a $300 million book. He gets a lucrative offer to join a smaller but growing bank called New Capital Bank. John tells all his clients that he will be at NCB starting Monday and he needs them all to bring their accounts over. John jumps ship and the clients follow. Morgan sues John alleging breach of a non-solicitation and non-compete agreement, misappropriation of trade secrets, and unfair competition. Morgan also sues NCB alleging misappropriation of trade secrets and tortious interference. This general scenario – financial advisors switching firms – raises a number of issues on the non-compete and trade secrets front. Both the financial advisors jumping ship and their new banks need to weigh a number of considerations before making any moves.
Key Considerations before Making the Move
(1) The Agreements – The contracts at issue will frame everything. Maybe there is one employment agreement that governs. Maybe there is an employment agreement and a stock agreement (e.g. the financial advisor also received compensation in the form of company stock). If the move involves poaching a team of several financial advisors, there will be several employment agreements. Do not expect the employment agreements to be standard, particularly if they were signed several years apart. Bottom line: Compile all of the written agreements that may be controlling.
(2) The Terms – Once the different agreements have been identified, they must be analyzed. Right from the jump, I’m looking for a few things: Choice of law (big difference between Florida and North Carolina or Illinois), arbitration or litigation, non-compete or non-solicit or both. Once I get a handle on the terms of all possible governing agreements, I can form a preliminary impression about (A) possible strategy for making the move and (B) possible risks. If faced with only a non-solicitation clause, it’s a much different ballgame than a case involving both a non-compete and non-solicitation agreement. If we are arbitrating the case under Illinois law, I have a much different set of considerations than if we are litigating the case in Florida. In fact, I have a different analysis if we are litigating in the United States District Court for the Southern District of Florida vs. the United States District Court for the Middle District of Florida. I’ll take it a step further: Which division of the Middle District? Believe me, it matters. Bottom line: Get a handle on the legal landscape.
(3) Leverage – Do we have any leverage? This is one of my favorite questions to ask and can open the door to numerous strategic possibilities. Does the former company owe the financial advisor money? Have they failed to deliver on bonus compensation? Have they somehow committed a prior breach of the employment contract? Have they done anything inequitable? Are they doing something unfair, ugly or illegal that adversely impacts the clients (e.g. unfairly costs them money, puts their assets at unnecessary risk, etc.). If any of these questions can be answered in the affirmative, that may give rise to (A) possible counterclaims (for breach of the agreement, unpaid bonuses, etc) or (B) affirmative defenses based on equity. Bottom line: I already said it: Do we have any leverage?
(4) The Roadmap – Both the financial advisor and the new company need a roadmap. The roadmap is based on everything above. It is a plan for how to move forward – how to jump ship or hire the talent – while minimizing the risks of litigation, maximizing chances of success in litigation and maximizing the value of the move. This is where we get into specifics like:
- Transition protocol and ground rules
- Cost benefit analysis of the move
- Strategy for acquiring the clients in the book
- Corporate structure: Contract terms & Chinese walls
- Proactive litigation (i.e. declaratory judgment, bonuses, etc.)
- Building a litigation defense
These are just a few considerations that financial advisors should weigh before switching firms and that banks should evaluate before hiring wealth managers away from rivals.
Jonathan Pollard is a trial lawyer and litigator based on Fort Lauderdale, Florida. He focuses his practice on defending non-compete and trade secret claims. Jonathan routinely represents doctors, corporate executives and other high level employees who are switching companies, or, who have started their own ventures. Beyond litigation, Jonathan advises employees, companies and business owners regarding restrictive covenant issues in connection with employment contracts, separation agreements, hiring decisions, the purchase or sale of business interests and the execution of commercial leases. Jonathan has been interviewed about non-compete issues by reporters from INC Magazine, the BBC and The Tampa Bay Times. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380. For more information, please visit For more information, visit http://www.pollardllc.com.