Protecting Investors

Neil Gross

Neil Gross is the executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada). During his 30 years as a lawyer, he specialized in investment malpractice litigation and securities law.

When an advisor switches firms, it’s the investor’s choice whether to stay or follow. Nothing should interfere with that

By Neil Gross |

Ugly legal fights sometimes break out when investment advisors decamp from one dealer and go to work at another. The advisor typically views his or her clients as a personal "book of business," built up through hard effort, and thus an asset that rightfully should transfer with the advisor. But the dealer being left behind usually sees the matter quite differently. To the firm, customers are clients of the dealer, whose business the advisor was handsomely paid to develop and secure.

Even a moderate exodus can prompt accusations that the advisor and new dealer conspired to illicitly harm the former dealer's business. All sides quickly lawyer up and, within a day or two, they're in court arguing about whether an injunction should be granted to prevent further solicitation of accounts.

Unfortunately, in those courtrooms no one speaks on behalf of the clients. What often gets forgotten, as a result, is the simple premise that clients should have the right to choose who advises them. If they want to stay with the firm — as some do because they like the dealer's size, stability or research capability — then that choice ought to be fully respected. Likewise, if a client prefers to go with the advisor who understands their financial situation and perhaps crafted their investment plan, then they should be able to do so.

Nothing should interfere with this choice. In particular, the client's preference shouldn't be constrained or thwarted by whatever competition restrictions may have been placed in the employment agreement their advisor and his or her former firm signed years earlier — a contract to which the client was never a party.

Those sorts of restrictions make sense for governing competitive relationships that are merely commercial in nature, like the supply of gardening services or sales of industrial machinery; but interactions between an investment advisor and their client often involve hallmarks more emblematic of what should be considered a professional relationship: trust, reliance, vulnerability and obligations to exercise skill and judgment appropriately for the client's benefit.

This difference takes the matter beyond the competing commercial interests of the firm and its former employee. It requires that emphasis be placed on safeguarding client interests when disputes over advisor departures get resolved. Moreover, there's a broad societal imperative to do so given the increasing importance of personal investing not only to individual financial security, but correspondingly also to society's overall financial well-being.

The idea of prioritizing client interests above commercial ones isn't radical or new. Others have raised the issue before. For example, mediator Joel Wiesenfeld penned guest columns on this subject in the December 2007 and November 2008 editions of Investment Executive when he was a securities lawyer. Yet, today, departing advisor disputes still occur and still get fought out in court in the same old way with clients' interests all too often being relegated to a secondary consideration in the outcome.

What can change this is a bit of proactive regulatory involvement. Everyone would benefit from a clear directive that a non-partisan notice must be sent to all clients immediately when an advisor moves to another dealer, informing them of three basic things: the fact that the advisor has switched firms; the advisor's new location and contact information; and the fact that the client has a right to choose between remaining with the old firm or transferring their account to the new one.

Ideally, this non-partisan notice should also urge clients to make an informed choice. It should encourage them to hold discussions with both the advisor and the former firm about why the advisor left. It should provide clients with guidance on key questions they can ask to gain insight into whether the departure reflects issues that should concern them about the advisor's or the former firm's reliability. And the notice should inform clients about resources available for checking the registration status and disciplinary history, if any, of the advisor, the former firm and the new firm.

The wording of such a notice should not be left to either side's discretion. It should be a standardized, mandatory form, in simple and clear language that clients can understand. And — just as importantly — the language should signal back to judges and courts that the normative priority within this community of investment firms and advisors is to safeguard client interests over the commercial interests of both the firm and the advisor.