Inherited books of business come with a catch

Receiving a windfall of assets from a retiring adviser can be a boon for a rookie’s business, but those clients come with strings attached, especially if the younger adviser plans on jumping ship.
Succession planning agreements between a retiring adviser and a newer broker frequently include clauses that make those clients harder to move between firms for several years after the contract is signed. In addition, those clients may not be covered by the Protocol for Broker Recruiting, an agreement between firms to allow the broker to take certain client information without fear of being sued.
“Often you have a scenario where the younger adviser, after two or three years, leaves and goes to another firm after the adviser has retired and believes their clients fall under the protocol,” said Salvador Hernandez, an attorney who represents brokerage firms for Riley Warnock & Jacobson PLC. “And the older firm is going to say, ‘Wait, you can’t solicit. You have agreements in the retirement contract.’”
Statistics are not available about how many intra-industry disputes, which comprise as much as 30% of all arbitration cases adjudicated by the Financial Industry Regulatory Authority Inc., revolve around succession agreements, but recruiters and attorneys say they are not uncommon.
Recruiting firms may not do due diligence on whether assets are tied up in contracts, and advisers, who are anxious to receive a seven-figure recruiting deals, may conveniently forget the specific language of their old succession planning agreements.
“This is really an issue,” said Danny Sarch, an industry recruiter with Leitner Sarch Consultants Ltd. “The old firm is always trying to extract a pound of flesh by waving those documents in front of a judge.”
In some cases, it is not just the firm that sues. Most of the succession agreements, which started to be put in place in the mid-2000s at the wirehouses, provide that the inheriting broker pays their benefactor a share of revenue for up to five years after he or she retires.
In one case, two advisers were ordered by a Finra arbitration panel to pay the retired broker, Eric Cook, $490,000 when they left Morgan Stanley Wealth Management to move to Bank of America Merrill Lynch while the succession agreement was still in place. Both Mr. Cook and Morgan Stanley filed claims against the advisers and Merrill Lynch.
The advisers “took these customer accounts to their new firm and received substantial bonuses from the new firm for doing so to the extreme financial detriment of [Mr.] Cook, who is now retired,” Mr. Cook’s lawyer alleged in his complaint.
The arbitration panel, as is typical, did not provide the reasoning behind their finding in favor of Mr. Cook. Morgan Stanley’s claim was settled separately.
Decisions usually center on whether the assets were considered to be inherited, or if they were so-called legacy assets that the younger adviser may have had a hand in managing. Advisers moving inherited assets frequently try to argue that they were involved in bringing in the assets initially or had helped manage them and thus are entitled to solicit the clients in question.
The language of the protocol supports that argument and provides protection for a departing team member if the adviser was in that partnership for more than four years. For long-term partnerships, it will be up to the financial adviser or the hiring firm to find a way that the retired adviser still is able to receive compensation after the move, but it may be easier to argue that the assets shouldn’t be considered the firm’s property.
“Ultimately, the concept of ownership of other peoples’ money is absurd and clients will go anywhere they want,” Mr. Sarch said. “Then it will sometimes come down to damages.”
As far as the retired adviser, every case is different, Mr. Hernandez said. Sometimes the adviser is party to the settlement when his former firm sues the hiring firm. In other cases, the retired adviser has to sign a new agreement with other advisers at the firm who take over what was left of the book of business after the original inheritors left.
Mr. Sarch said he has also seen the inheriting advisers work out an agreement with the retired adviser to try to provide the retired adviser a share of revenue from the new firm.
“There are no easy answers out there,” Mr. Hernandez said. “In the back of your mind, you’re always wondering how the retired adviser’s issue is getting addressed, and it’s different every time.”
“All the rules are subject to varying interpretation,” said Arthur Koski, an attorney at an eponymous firm who represents brokers. “I don’t think there is any one case you can point to and say this is the guiding light for a problem of this type.”