Financial advisors who are going independent need to make sure that they aren't stepping on their former employer's toes, lest they find themselves embroiled in costly litigation, experts say.
D. Alexander Washington, president of the Washington Consulting Group in Bala Cynwyd, Pa., says that when he contracted with his prior employers -- major financial institutions -- they disclosed that all clients were the sole property of the institution and would remain with them should his contract be terminated for any reason.
The contracts also typically contained a non-compete clause for up to one year.
"I suggest when considering going independent, to market a product or two totally outside of the products marketed under your current contract to avoid any conflict of interest and probable litigation," Washington says.
Alan Moore, founder of Serenity Financial Consulting in Milwaukee, says that advisors going independent would be wise to tell the firm what their niche market focus would be.
If the focus is different than that of the firm, the principals likely wouldn't mind if the advisor takes a few clients within a niche and might even refer new clients to them.
The same is true for clients who may not be generating a certain amount of revenue, says Mark P. Cussen, a financial author and educator in Leavenworth, Kan.
"Most firms will be more protective of high-net-worth clients than they will be of someone with $50,000 in a mutual fund," he says.
Another way to avoid litigation is connecting with clients on social media, Cussen says.
This can be an excellent method of announcing moves, because social media isn't connected to clients' financial accounts and lie outside the holding firm's jurisdiction. Advisors using this strategy connect with their clients on LinkedIn or become their Facebook friends before they leave the old firm, and then after advisors start a new firm, they post a general Facebook comment or change their LinkedIn status that they have opened their doors, and their former clients will get automatic notifications just like everyone else connected to or friends with them. This, way, they aren't actively reaching out to their former clients.
Arthur Stein, founder of Stein Financial in Bethesda, Md., used to work at a registered investment advisory firm that traded through Raymond James, and his contract with his former employer specifically stated that he owned his clients and whenever he left, he could take them with him.
"Once I decided to leave, I sat down with the owner of the RIA to review a list of who I considered to be my clients," Stein says. "There was no disagreement, and we also agreed on how the transfer would be done."
Jennifer Woods Burke, securities attorney and the founder of compliance consulting firm CompliGuide in Palisades, N.Y., says few advisors actually negotiate their ultimate departure when they first start working for a firm.
"Instead, they sign whatever is put in front of them without giving much consideration to what is in their best interest and what can be changed in a contract, if anything," she says.
"If your manager and your firm loves you then there is likely a possibility that you can come to terms on matters after the fact. Sometimes you can also negotiate further when the firm is desperate for you to leave," Burke says.
"Bottom line: It is something that a financial professional should consider and may be worth the shot," she says.
Katie Kuehner-Hebert is a freelance writer in Running Springs Calif. She has contributed to Financial Planning, On Wall Street and American Banker.
This story is part of a 30-day series on going independent.
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