In recent years, there has been a considerable increase in the number of financial advisors who are looking to break-away and transition to careers with registered investment advisory firms (“RIAs”) or even launching their own RIA seeking more independence, control, growth opportunities, and increased compensation.
In January 2020, TD Ameritrade Institutional (“TDAI”)[1] released the results of their annual “Breakaway to Independence Survey”. They found that 55% of respondents were planning to breakaway within the next 12 months, which represents an 11% increase over the survey from the previous year. [i]
2019 saw a record number of advisors breakaway and transition, and it does not appear as if the trend is slowing in 2020.
While many advisors are eager to join a new investment advisory firm or start their own RIA in pursuit of increased independence and revenue, some find the legal and compliance hurdles daunting. Advisors must consider and navigate several key legal and regulatory restrictions during the onboarding and transitioning processes.
To start, we believe it is important to have an experienced attorney guide advisors through these important considerations as well as the myriad of regulations, contracts, filings, and disclosures all required to complete the transition.
The process takes both time and money and it is crucial that the advisor ensures compliance with all applicable rules and regulations. Without proper planning and guidance, the transition could be delayed, more expensive than originally anticipated, or trigger costly and detrimental litigation.
In light of the significant increase and interest in breakaways and transitions, here are the top three (3) considerations that we believe are important for advisors to consider.
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Consideration #1: The Broker Protocol
The Protocol for Broker Recruiting (“The Protocol”) is an agreement among parties created in 2004 as a means of allowing certain confidential client information to move between firms that sign and adopt the Protocol.
The goal of The Protocol is to allow clients to follow their financial advisor while ensuring that their personal identifying information (“PII”) is being protected. It also attempts to minimize litigation between firms that are parties to The Protocol. It also outlines the information that an advisor leaving a firm can take with them so long as the advisor follows the terms of The Protocol.
It is important for advisers seeking to breakaway and transition to contemplate the requirements of The Protocol to mitigate the risks of possible litigation by their former firm.
Consideration #2: Does My Contract Contain Restrictions on My Activities?
An advisor must carefully review and consider the restrictions in their employment contracts to ensure that they fully understand any provisions that could prevent them from engaging in certain activities.
Frequently, advisors are confronted with a multitude of restrictions including non-solicitation clauses, and in some states where enforceable, non-compete agreements.
Additionally, these employment contracts can preclude advisors from communicating with clients and keeps an advisors from bringing their existing clients to their new firm.
It is important for advisors to fully understand and consider all of the provisions in their employment contracts. They should carefully review the employment contracts with their onboarding team at their new firm, with the assistance of a seasoned securities attorney.
Consideration #3: How Am I Impacted by Privacy Laws?
Regardless of whether you are subject to Regulation S-P[ii] or a state rule such as California Consumer Privacy Act (“CCPA”)[iii], there are specific limitations on how and when a new firm can receive 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.
In order to avoid an inadvertent violation of these privacy laws, RIAs have to ensure that the onboarding process for the client is done in an organized fashion; otherwise, if the transition is done hastily it could create considerable headaches for advisors and their RIAs down the road.
For more important considerations regarding Breakaways and Transitions, check-out “Breakaway 101: FAQs for Transitioning Advisors” by Jacko Law Group.
Should you have questions or concerns about the breakaway and transition process or if you require any assistance or guidance with the breakaway or transition process, please contact us at (619) 278-0020 to schedule a consultation. Our legal and compliance experts are standing by to help you.
[1] Jacko Law Group provides transition services for TD Ameritrade as a strategic partner.
[i] “More Than Ever, Brokers Are Keen to Join the Independence Movement, New Survey Commissioned by TD Ameritrade Institutional Finds.” TD Ameritrade, TD Ameritrade Holding Corporation, 30 Jan. 2020, www.amtd.com/news-and-stories/press-releases/press-release-details/2020/More-Than-Ever-Brokers-Are-Keen-to-Join-the-Independence-Movement-New-Survey-Commissioned-by-TD-Ameritrade-Institutional-Finds/default.aspx.
[ii] See 17 CFR Part 248