open door business

If you are thinking of leaving your dealer to join another, or even to start your own firm, there are some important issues to consider to ensure you protect your business, reputation and clients. These include informing yourself of your legal rights and obligations before you pull the trigger.

I have been practising employment law for over 20 years — the last five years exclusively in financial services — and I have seen many advisors make mistakes that seriously and negatively impact their business, licence and reputation. An ounce of prevention can result in avoiding costly and protracted litigation. I have compiled the following list of considerations.

1. Find your existing contract. Many advisors have been at the same dealer for many years, and they don’t even know where to find their existing contract. I urge you to find it before you terminate your dealer relationship as this will likely dictate most of your legal obligations and rights.

2. Understand the difference between employment and principal-agent agreements. If you are an employee, your obligations will likely be more stringent than if you are in a principal-agent relationship. However, even in a principal-agent relationship, the agreement will contain both rights and obligations of the advisor and dealer, so you need to read the provisions of your existing agreement carefully and understand the terms to avoid making any mistakes on the way out.

3. Know that your clients own themselves. Clients get to choose whether they follow you to your new dealer, and they will vote with their feet — or with their money in this case. Your contract will not say that you own your clients. Rather, your contract will provide (if it is drafted properly) whether you have the right to solicit your clients immediately after resignation/termination.

If the terms are that you can solicit your clients right out of the gate, the likelihood of clients following you increases substantially because you can call them and solicit them to follow you. If there is a non-solicitation clause associated with clients (not to be confused with a non-solicitation clause associated with employees), then you need to inform yourself as to your rights and obligations contained in that provision, because if you are not permitted to solicit the clients, you may lose your entire business by leaving.

4. Know when you can contact clients. Yes, I know most advisors begin to speak to their clients about leaving before they resign from their dealers, to canvass them on whether they would follow them to the new dealer. However, know that contacting your clients before resignation is likely a breach of your duty to your dealer. While it is unlikely that you will be called onto the carpet by your dealer if you have a right to solicit clients immediately after resignation, if there is litigation between you and the dealer, this evidence of pre-resignation solicitation will not bode well for you.

5. Don’t be too lucky in love with your new dealer. Take off your rose-coloured glasses and put on your reading glasses to understand the new dealer’s contract and what you are being offered. Look beyond the remuneration clauses. Review the clauses that address what happens if you leave the new firm: Will you be permitted to contact clients immediately after resignation or will you inadvertently be selling your business to the new dealer if a clause prohibits you from soliciting immediately after resignation? In the latter case, you would want a substantial payment for the purchase of your business. An agreement of purchase and sale of your book of business is a completely different type of agreement and you will need legal advice.

6. Review details about a lump sum enticement payment/forgivable loan. If you are receiving an enticement payment, review these provisions of the agreement carefully to ensure you understand the legal implications. Because the clause likely forgives portions of the loan over time, advisors who spend the money before it is forgiven may find that they are in a financial bind if the repayment clause is unexpectedly triggered (i.e., they lose their licence, are terminated or need to resign before the end of the period).

Even if the advisor uses the money responsibly — paying off a mortgage, for example — if they are unemployed at the time they need to repay the loan, getting another mortgage would be difficult, and selling their homes would be a nightmare for their families. Furthermore, if other advisors or your previous dealer tell your clients that you’re receiving an enticement from your new dealer, clients may become distrustful and not follow you. Some advisors feel that accepting such payment is a conflict of interest and therefore refuse to accept these sweeteners.

All this to say it is far better to understand the legal and regulatory risks associated with moving from one firm to another before you take the plunge, so that you don’t risk your business and reputation, and waste hours and money in protracted litigation.