Among the most notable workplace trends in recent years has been the growing number of financial advisors seeking to break away and transition their careers. To many, the allure of joining a registered investment advisory (RIA) firm or launching a new RIA is the desire for greater independence and increased compensation.
Advisors who have made the transition know that successful change depends on a combination of preparation and opportunity. With that in mind, it’s important to get a head start on navigating several key legal and regulatory restrictions during the onboarding and transitioning processes.
To ensure compliance with all applicable rules and regulations, advisors thinking about making a move can benefit from the value an experienced attorney can provide. In the long run, having specialized guidance with contracts, filings, and disclosures can save time and money and let you focus on what you do best.
When it comes to breakaways and transitions, the top four considerations for advisors to avoid costly and detrimental litigation involve protocol, provisions, privacy, and preparation.
The Broker Protocol
The Protocol for Broker Recruiting (The Protocol) was created in 2004 to reduce the likelihood of litigation when an advisor moves between firms, to assist the facilitation of advisors in moving from one firm to another, and to minimize client impact. Although Merrill Lynch is the only firm remaining in The Protocol among the three co-founders now that Morgan Stanley and UBS have withdrawn, more than 1,900 firms (both broker-dealers and investment advisers) are members.
If the onboarding firm and the advisor’s former employer are both members of The Protocol at the time of a breakaway, the risks associated with the transition are minimized if all conditions in The Protocol are met.
Transitioning advisors tend to have one overriding question regarding The Protocol. What client information can I take with me? The answer – enough to get started. This includes the client’s name, address, phone number, email address, and account titles. But beware – the information the advisor takes must be disclosed to the former employer at the time of resignation. Thorny issues can develop when a disagreement arises regarding whose client it is – the advisor’s or the former employer’s?
The best way for advisors to mitigate the risks of possible litigation is to know restrictive covenants contained within their agreement and to check whether both their current and future firms are members of The Protocol. Consulting with counsel is always highly recommended.
An experienced securities attorney can help a transitioning advisor review and consider the restrictions in their employment contracts. This is particularly true since each state has its own employment laws.
Frequently, advisors are confronted with a multitude of restrictions that could prevent them from engaging in certain activities. These include confidentiality provisions, non-solicitation clauses and, in some states where enforceable, non-compete agreements.
Disputes over confidentiality, non-solicit provisions and non-compete agreements are increasingly common issues to deal with when an advisor is leaving an RIA. Employment agreements themselves have become far more common as independent RIAs have grown larger. Two of the most common restrictions are the use of your former firm’s proprietary or confidential information and soliciting client accounts and employees to move your new firm.
Regardless of whether you are subject to Regulation S-P or a state rule such as California Consumer Privacy Act (CCPA), specific limitations exist on how and when a new firm can receive Personally Identifiable Information (PII) regarding clients.
Regulation S-P provides clients with the ability to request that the RIA not share PII with any affiliated or unaffiliated companies. The CCPA goes further, by allowing consumers the right to know, request, and delete PII. Companies subject to the CCPA can face steep fines and in some instances, catastrophic litigation.
To avoid an inadvertent violation of these privacy laws, RIAs must ensure that the onboarding process for the client is done in an organized fashion. If the transition is done hastily, problems could arise. Many financial firms have established transition teams as a value-added service to assist advisors with completing the onboarding firm’s new client paperwork.
Prepare for Opportunity
For years, Jacko Law Group, PC has helped many clients through the breakaway and transition process. Our team of specialists stand ready to assist you in making your next move a successful one. To schedule a consultation, give us a call at (619) 298-2880 or visit us online at jackolg.com.
- Managing Partner and CEO
Michelle L. Jacko, Esq. is the Managing Partner and CEO of Jacko Law Group, PC, which offers securities, corporate, real estate and employment law counsel to broker-dealers, investment advisers, investment companies ...
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