Difference of Opinion

That said, you raise another key point. A firm owner and firm employee don’t come to the table with the same cards. The owner has a legal advantage that’s significant; the employee may have a business advantage (in the client relationship) that can be significant. Each may have legitimate claims; you would have to see how the hands are played each and every time to resolve the issues raised in a departure. For example, the owner in the firm has invested significantly in training, attracting the clients, launching the firm to begin with, and all the myriad risks, liabilities, and responsibilities of firm ownership.

Clark: While I would argue about relevance of the responsibility to the firm and owner’s “investment” you’re raising, I don’t doubt for a moment that most advisory firm owners believe strongly in both. I suspect that it’s because firm owners feel so strongly about them, that this is such an emotional issue. And because it is so emotional, I’m not sure that firm owners are really thinking clearly about it.

In my view, the primary responsibility of an advisory firm is for the financial well being of their clients. That’s its fiduciary duty. And in the case of clients who wish to continue to work with an advisor who’s leaving the firm, it seems to me the first obligation of the firm is act according to those wishes by ensuring a smooth and orderly transition of client services and records. By allowing their emotions to take over, and act in the interest of the firm and/or the owners by trying to protect its economic interests, or mitigate its liability by acting contrary to its clients’ wishes is violating its professional fiduciary duty.

Rostad: I understand your point, here, and agree to a point. But I don’t think you give enough credence to the value that firm owners add, the principal-agent relationship, and employees’ responsibilities to the firm. You can’t separate those factors from this situation. However, I do think that this entire issue quickly may become moot with the widespread use of non-compete agreements in advisory firms these days.

Clark: Again, this is exactly the problem. You’re suggesting another “solution” for the firm to keep the clients. We know from a long history of financial advice that clients don’t have relationships with “firms.” They have relationships with advisors. By refusing to face this reality, owner advisors fail to create career tracks, partnership opportunities, underpay employee advisors, and end up losing the clients (if not to leaving advisors, then to another outside advisor). The solution is not to keep trying in vain to tie the advisors to the firm, but create a situation where the lead advisors with the client relationships want to stay at the firm.

What’s more, it’s hard for me to believe that non-competes and non-solicitations will be very effective. For one thing, they’re hard for courts to enforce when the clients clearly want to work with the leaving advisor.

Rostad: Yes, non-competes and non-solicitation agreements are more and more difficult to enforce. The challenge, as you point out, is these agreements were originally designed for salesmen selling widgets in a geographic territory–not advisors providing “consulting services” in an “open” territory.

There’s another issue here that needs examination. Your premise seems to be that all or most investment advisors seek to become a true firm–one that grows beyond the founder or initial partners. I question this premise, and wonder how many advisors are able to make the leap. The fact that these one- and two-man shops are not willing to give up control or ownership share, may not necessarily be connected to the high turnover rate of their professional employees. I’m not sure how may advisers intended to build a firm in the first place.

Clark: If advisors don’t “intend” to build a firm, then they shouldn’t hire or promote lead advisors and turn their clients over to them. Once you’ve done that, you have a firm, whether you like it or not.

The one thing we do agree on is the need for industry standards for transferring clients that will enable the wishes of the client to be respected, while protecting the firm against securities and privacy liability. It seems to us that a scenario in which the advisory firm–when notified that an advisor is leaving–would take responsibility to contact that advisor’s clients, notify them of her imminent departure, and of their option to stay with the firm or go with the advisor, along with the forms to authorize that transition. That way, the firms would clearly be looking out for the clients’ best interest, covering their own liabilities, and acting as true professionals.

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].