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Bates Research  |  07-08-16

Who Owns the Client When a Financial Advisor Leaves?

Guest Post by Expert Geoff Winkler

Part II, continued from our post on June 24th

Introduction

Historically, when a financial advisor or “broker” left a firm, they had to decide between leaving their clients behind or taking them to the new firm and risking a lawsuit from their former employer. That all changed in 2004 when the “Broker Protocol for Broker Recruiting” (the “Protocol”) was adopted by Smith Barney (now Morgan Stanley), Merrill Lynch and UBS. The Protocol created a common understanding among adoptees that they would not sue each other or their former brokers if certain procedures and limitations were followed. The Protocol has since been adopted by over 1,000 firms.

In order for the Protocol to apply, several requirements must be met. First, both the firm that the broker is leaving and the firm that the broker is about to join must be signatories to the Protocol. Second, there are certain procedures that must be strictly followed to prevent a previous employer from claiming waiver of the Protocol. They include the requirement that the broker’s resignation be in writing, drafted clearly and concisely and delivered to the local branch manager with a copy of the client information that the broker intends to take. The broker may only take the client name, address, phone number, email address and account title. Finally, clients may not be contacted until after the broker is fully employed by the new firm.

What the Protocol Does Not Mean to the Broker and Firm

While the Protocol can provide protection for brokers, there are certain limits. First, brokers must be careful when removing client information from their old firm: taking more than the information described above will open them up to potential litigation from their former employer or regulatory actions from FINRA. For example, FINRA fined (CRD #723330) a financial advisor $10,000 and suspended him for 10 days in 2013 for taking a flash drive from his former employer that contained, in addition to the information allowed above, clients’ social security numbers and other sensitive information.

Second, although the Protocol allows brokers to voluntarily change firms, language in the agreement specifically carves out the act of “raiding” another firm’s brokers. If raiding is suspected, the offending firm will not be protected from suit by the firm that believes it was raided.

Third, FINRA is currently paying particular attention to the acts of brokers when they leave their old firms. Last month alone, two FINRA consent orders were entered against brokers that altered personal information or documents in an attempt to retain the client and prevent the old firm from contacting them.

Finally, financial firms, including signatories to the Protocol, have recently begun chipping away at the protections offered by the Protocol by limiting the number, type or specific clients that the broker can take with them as a precondition of employment. 

While brokers may be allowed to take clients with them when they leave their firm, there are many exceptions and rules that must be followed. Financial firms seeking to prevent brokers from taking clients when they leave must evaluate the benefits and drawbacks of implementing measures that limit this mobility as it will likely affect them negatively as well when they are hiring brokers. Both parties must also pay close attention to ensure there are no continuity of service issues involved, to avoid running afoul of current rules and regulations.

For more information about Bates Group’s employment consulting and expert testimony services, including those related to wrongful termination, transition disputes, U5, CRD, and other employment issues, please contact us at 503-670-7772 or contact@batesgroup.com.

Disclaimer

The information provided on this website is for information purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.